Chapter 11. Macroeconomics and Household Heterogeneity The goal of this chapter is to study how and by how much household income wealth and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the US Great Recession of 2007–09 and proceed in two steps. First using data from the Panel Study of Income Dynamics we document the patterns of household income consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (ie they are not hand to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies such as unemployment insurance play in shaping the cross sectional income and wealth distribution and through it the dynamics of business cycles.