Purchase Solution

Housing and GDP

Not what you're looking for?

Ask Custom Question

New federal housing data shows that the nation's most overheated local housing markets make up such a large share of the total US market that a sharp fall in their value could stall or slow economic growth. If worst case is true, and a sharp fall in real estate values leads to a decline in GDP, assess:

1. how this situation would be depicted using an IS-LM diagram where the equilibrium and interest rate before the fall in real estate values are Y0 and r0 (Y subzero and r subzero for income and interest rates). Include/show any new equilibrium values.

2. how could a sharp fall in real estate values affect the GDP?

Now assume that even after a fall in real estate values and decline in GPS, the fed continues with its interest rate increase campaign and increases the federal funds target rate:

3. using the same IS-LM diagram from 1, show this new situation depicted.

Now suppose the fed decides not to change the federal funds target rate after the fall in real estate values and decline in GDP:

4. what policy options are available to the government to counter the effect of a sharp fall in real estate values on the economy? Again, using the same IS-LM diagram from 1, show the effect of these policy options.

5. would these policy options affect the government budget deficit? How?

Purchase this Solution
Solution Summary

This solution gives you a detailed discussion on Housing and GDP

Solution Preview

You should see the attachment.

STEP 1
There is a sharp fall in real estate values and this leads to a decline in the GDP. On the IS-LM diagram this would mean that the IS curve would shift to the left. If the interest rate before the fall in real estate values are Y0 and r0. The new values that is Y1 and r1 will be lower than the original Y0 and r0. This situation is depicted in the IS-LM diagram given below.

In other words this means that if there is a ...

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

View More Free Quizzes
Related BrainMass Solutions

  • Shifts in IS and LM curves

    281787 IS-LM graph, IS-LM diagram needed for questions on stock market, housing prices, Fed policy Suppose that both the stock market and housing prices fall in the U.S. a.

  • Home Building Industry

    However, in practice a higher unemployment rate may be a result of a lower GDP and there would be a trade off in the two effects. Lower unemployment also means a greater demand for housing.

  • Evaluate Canada's economy

    523278 Evaluate Canada's economy Analyze and interpret data trends (e.g., unemployment, inflation, real GDP, interest, housing starts) over the most recent three-year period to evaluate the economy and Canada's current economic status.

  • GDP, employment increase, and inflation increase

    360450 GDP, Employment Increase and Inflation Increase How are factors such as GDP, unemployment, and inflation relative to a buisness cycle? What would be some variations and perspectives from current economic downturns?

  • A spike in the unemployment rate - the biggest in more than

    This implies that the relationship between real GDP and potential GDP is less than the potential GDP.

  • GDP Per Capita & Recessions

    The housing bubble resulted from speculation in the housing market. Rather than viewing housing as a necessary expenditure, households began to view it as an investment.

  • AD-AS diagram

    This will shift the short-run AS curve to the left, and the short-run equilibrium will shift to the left with lower equilibrium output (real GDP) and higher price level. Shock 2: A bubble in the housing market that bursts.

  • Macroeconomics multiple choice

    housing, transportation, and food & beverages. housing, food & beverages, and education & communication. housing, medical care, and education & communication. 7.

  • The Four Components of Gross Domestic Product

    In this way, only those residences that add to the overall housing stock count towards GDP, and 3.) Changes in inventories - Firms invest in inventories, which are produced goods held in storage in anticipation of later sales.

View More Related Solutions