BUS 2203 - Written Assignment Unit 2 Adafsdfsdf

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Written Assignment Unit 2
University of the People
BUS 2203 Principles of Finance
Kimberly Green, Instructor
November 23, 2022

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Written Assignment Unit 2
Introduction
The author's position regarding the role of US monetary policy and the housing market
bubble is that it is not directly responsible for causing the housing prices to rise and then
plummet.
According to Dokko et al. (2009), monetary policy was well aligned with the goals of
policymakers and was not the primary contributing factor to the extraordinary strength in
housing markets. The relationship between interest rates and housing activity simply is not
strong enough to explain the rise in residential investment or house prices.
Low rates accompanied increase demand for housing
Low interest rates motivate people to borrow money to buy houses because a low interest
rate will naturally have a lower installment fee, and this condition will make more people eligible
when they submit the loan application to the bank to buy a house.
Since interest rates were kept too low for too long, people would start to put their money
to good use and this interest rate policy would indirectly contribute to the housing bubble later
on.
Loose versus tight monetary policy
Tight monetary policy when the central bank increases the interest rate to slow down the
overheated economic growth because an increased interest rate will reduce spending in an
economy that is seen to be accelerating too fast, this condition also can slow down inflation
when it increases too fast (Zanzalari, D., 2022).

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Loose monetary policy is the opposite of tight monetary policy, where the central bank
would decrease interest rates to promote economic growth as it encourages spending to support a
weakening economy.
Taylor’s rule
The Taylor Rule is an equation linking the Federal Reserve's benchmark interest rate to
levels of inflation and economic growth (Hayes, A. 2022). It is used to provide a good summary
guide to policy settings as financial market participants are able to form a baseline for
expectations regarding the future course of monetary policy (Dokko et al., 2009).
Rise of cheap and available credit stimulated housing demand
When the availability of cheap credit increases, it will stimulate people to borrow more
money and spend it through buying houses, therefore the demand for housing will increase
significantly. If the housing supply is behind the housing demand, it will increase the housing
price sharply.
Evaluate monetary policy by how effective it is in attaining goals
The goal of applying aggressive monetary policy by reducing the interest rate In 2002-
2003 are:
- to stabilize the high unemployment rates as a result of recession
- to stabilize the rapid declining of inflation
Based on the table of FOMC Forecasts of Key Macroeconomic Variables by Dokko et al.
(2009), it shows a constant downtrend in unemployment rates from the year 2003 through 2006.
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This shows the monetary policy’s effectiveness in combating unemployment. The reduction of
the interest rate encourages a more stable economic situation so as to prevent the market from
being too volatile.
Evidence that monetary policy played a role by the timing of housing boom
In the US, housing prices started to increase rapidly in the late 1990s. The housing price
increased 7-8 percent annually in 1998-1999, increased 9-11 percent annually during 2000-2003,
and increased 15-17 percent during 2004-2005 (Bernanke, B. S., 2010).
The interest rate was lowered quickly in response to the 2001 recession from 6.5 percent
in late 2000 to 1.75 percent in December 2001, and reduced to 1 percent in June 2003.
In June 2004, interest rates started to increase, reaching target 5.25 percent in June 2006.
The monetary policy that lowered the interest rate also indirectly caused an increase in
the demand for housing and with limited supply, made its price skyrocket.
Conclusion
Timing of the housing boom
Bernanke (2009) argues if accommodative monetary policies during the period of
increasing housing prices can reasonably account for the magnitude of the increase in house
prices. It is also said that house prices rose significantly not only in the United States but also in
many industrialized countries during this period. If monetary policy were really an important
factor in house prices, it would stand to reason that other countries with easier monetary policies
would have a significant increase in house prices along with the United States which was argued
to have a ‘too loose’ monetary policy. However, other countries were not seen to have the
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housing bubble phenomenon and only a small portion of the increase in house prices can be
attributed to the stance of U.S. monetary policy.
Economic simulation models
When using Taylor’s rules with the FRB/US model, it forecasts a lower GDP than what
was actually realized, it also shows higher unemployment rates than actually realized.
With the autoregression models, it shows that the realized path of the federal funds rate is
within the 2–standard deviation conditional forecast band, suggesting that policy was not
unusually loose in this period (Dokko et al., 2009).
Monetary policy seems to have a more limited role in the housing bubble and instead
developments in housing finance, and mortgage markets more broadly, may have contributed to
the rapid growth in house prices (Dokko et al., 2009).

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References
Bernanke, B. S. (2010, January 3). Monetary Policy and the Housing Bubble. Federal Reserve
Board. https://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm
Dokko et al. (2009, December 22). Monetary Policy and the Housing Bubble. Federal Reserve
Board. https://www.federalreserve.gov/pubs/feds/2009/200949/200949pap.pdf
Hayes, A. (2022, June 24). What is the Taylor rule. Investopedia.
https://www.investopedia.com/terms/t/taylorsrule.asp#:~:text=The%20Taylor%20Rule
%20is%20a,above%20the%20annual%20inflation%20rate
Zanzalari, D. (2022, May 1). What is tight monetary policy? The Balance.
https://www.thebalancemoney.com/tight-monetary-policy-5216724

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Written Assignment Unit 2

University of the People

BUS 2203 Principles of Finance

Kimberly Green, Instructor

November 23, 2022

Written Assignment Unit 2

strong enough to explain the rise in residential investment or house prices.

Low rates accompanied increase demand for housing

Loose versus tight monetary policy

when it increases too fast (Zanzalari, D., 2022).

Rise of cheap and available credit stimulated housing demand

Evaluate monetary policy by how effective it is in attaining goals

- to stabilize the high unemployment rates as a result of recession

- to stabilize the rapid declining of inflation

being too volatile.

and increased 15-17 percent during 2004-2005 (Bernanke, B. S., 2010).

Timing of the housing boom

Bernanke (2009) argues if accommodative monetary policies during the period of

attributed to the stance of U.S. monetary policy.

Economic simulation models

unusually loose in this period (Dokko et al., 2009).

the rapid growth in house prices (Dokko et al., 2009).

Hayes, A. (2022, June 24). What is the Taylor rule. Investopedia.

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