THE ROOTS OF ECONOMIC CRISIS

A). Start with the US housing market . Explain , using supply and , what you believe led to rapid rises in housing prices over the last decade . Please try to make guesses ( assumptions ) about the elasticities of supply and demand and then explain your assumptions . You’ll get credit as long as you provide the correct logic for the kind of elasticities that you have chosen . If it helps , choose one small place , town or suburb that you know and answer the question for that place .

B). Why have housing prices fallen rapidly thest past three years ?

C). If the federal government doubled the Mortgage Interest Deduction , show the effect of this by palcing all other goods ( AOG ) on the Y axis and housing on the X axis .

D), Now show the effect of this doubling of the mortgage interest deduction in a supply and demand framework .

E). Would this be a good policy to target or help at risk mortgages ? Elaborate . What effects might it have ?

F). Let’s pretend that in desperation , the Federal Government decides ( I imagine somehow justified by the commerce clause of interstate trade ??) to put mandatory price floors into teh housing market not allowing any at – risk mortgages to drop more than 15 % from their most recent sale price . Let’s assume that these price floors already exceed the market price for many homes that hevr at – risk mortgages .

1) first show the effect of these price floors on a representive set od housing including changes to consumer , producer surplus and deadweight loss .

2). It seems like this policy should reduse defaults mabe ?? and prop up some housing prices , what might be problematic or troubling about this policy ?

G). On to real life , the Obama stimulus package offered a $8,000 tax credit to any new home buyer in 2009 and until , I believe , may 2010 . How did this affect the housing market during this time ? What happened when it ended ?

H). Should anything else be done by government about either lower home values or about reducing defaults ? Take a quick guess or two at what micro might think or what you might think ?

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