Question

You were hired six months ago by your congressional representative as a policy advisor. Your boss has been very impressed with your insight and research, and has promoted you to be the primary economic policy advisor!

As you are reading the economic news today, you come across the following headline: "Consumer Confidence Slumps as Home Prices Decline for Sixth Straight Month". The article is discussing how households feel less wealthy as a result of a decline in home prices. Because roughly 50% of household wealth is the value of their home, a sudden decrease in the price they can potentially sell their home for if they needed to makes them suddenly less wealthy. As a result, households are spending far less of their incomes. As an additional problem, uncertainty about how much more home prices might go down has lead to a decrease in people buying new homes (remember that new home purchases are included in GDP, but not in the "C" component of the GDP formula).

You go out and collect the following information:

Macroeconmic Indicator - Value of the indicator- Source of the Indicator

Current output - $14.42 Trillion - Congressional Budget Office ("CBO")

Est. full employment output - $16 Trillion - CBO

Current rate of unemployment - 9.9% - Bureau of Labor Statistics ("BLS")

Est. natural rate of unemp. - 5.5% - CBO

Current inflation rate - 0.1% - BLS

Target rate of inflation - 2% - Federal Reserve

Current Fed Funds rate - 2.1% - Federal Reserve

Current MPC - 0.95 - CBO

Current Reserve Requirement-25% - Federal Reserve

Your congressman is concerned about the current state of the economy. Your job is to prepare a policy memo to fully brief your congressman about the current state of the economy. Your Policy memo should identify both a fiscal policy solution and a monetary policy solution. GIve examples of both.

Answer 1

To address the negative report on home prices and consumer confidence, a fiscal and monetary policy solution can be implemented. A fiscal policy solution could involve tax cuts or tax credits for homebuyers, while a monetary policy solution could involve lowering interest rates or quantitative easing.

Step-by-step explanation:

In light of the negative report on home prices and consumer confidence, the current state of the economy is concerning. To address these issues, both fiscal and monetary policy solutions can be implemented.

Fiscal Policy Solution:

A fiscal policy solution would involve the government using its spending and taxation powers to stimulate the economy. In this case, the government can consider implementing a tax cut or a tax credit for homebuyers. This would incentivize consumers to spend more and potentially boost the housing market. By increasing consumer spending, it can help counteract the decrease in household wealth and stimulate economic growth.

Monetary Policy Solution:

A monetary policy solution would involve the actions of the Federal Reserve to manage the money supply and interest rates. In this situation, the Federal Reserve can consider lowering interest rates. Lower interest rates make borrowing more affordable, which can encourage consumers to take out loans to purchase homes. This would help increase demand in the housing market and stimulate economic activity. Additionally, the Federal Reserve can use other tools such as quantitative easing to inject liquidity into financial markets.