Reference no: EM131186835

Macroeconomic Analysis paper

Scenario:

After hearing of your taking this course in business economics, Uncle Dan has e-mailed you asking for advice on his 100-acre corn farm. He mentioned how, after 30 years of growing corn, he wishes to leave that commodity's market and enter a more profitable market instead. He is thinking of subdividing his land and building homes and shops. He reckons he could make a good profit by selling the homes and renting the shops.

Before you can find time to answer Uncle Dan's e-mail, you read the piece "Will the Fed's New Policies Revitalize the Housing Market?" on page 896 of the textbook. Recognizing the costs and risks for Uncle Dan in making the switch, you decide to research the economy in terms of GDP growth rate, interest rates, level of unemployment, the business cycle, fiscal policy, monetary policy, international trade, and demographics. You decide to educate yourself about macroeconomics so that you can provide Uncle Dan with the most informed advice possible.

Requirements:

Macroeconomic areas you are to address, with sources, in your answer. Briefly you are to research and show how these apply to your scenario: GDP growth rate (20 points), the business cycle (30 points), fiscal policy and level of unemployment (50 points), monetary policy and interest rates (50 points), international trade (40 points), and demographics (20 points).

Macroeconomic Paper as a Professional Report

Your paper should be organized into five parts as listed below.

1. Title Page: Name, class, and date

2. Introduction to situation but do NOT copy the scenario. Briefly summarize the situation and identify the macroeconomic issue(s) to be decided from the perspective of the organization.

3. Business Cycles, Unemployment, Inflation, International - Comparative Advantage, Exchange Rates, Trade, Etc., Monetary Policy and Interest Rates, and Fiscal Policy and Unemployment Identify the variables that are critical in addressing the issue(s). Gather and present the relevant data on the variables by searching the DeVry Online Library. Ask a librarian for help if needed. Use in-text citation to report the source(s) of the data. Graphs may be included here.

4. Recommendations and Economic Justification

Formulate and present your recommendations for addressing the issue(s) based on the relevant data and economic principles identified above. Justify your recommendations in terms of the economic impact on those affected.

5. References

List the full references for at least five sources alphabetically in APA format.

Will the Fed's New Policies Revitalize the Housing Market?" article

AN INSIDE LOOK AT POLICY Fed Attempts to Stimulate Housing Market... Again

ATLANTIC

Will the Fed's New Policies Revitalize the Housing Market?

Congress is gridlocked, consumers are pessimistic, and firms are barely hiring. To speed this recovery up-or to prevent a double dip-it might be up to the Federal Reserve. Last week it announced its latest attempt to revitalize the economy. Its chief target appears to be the still anemic housing market. Will the new policies work?

The Fed's Plan

a The central bank will take two different actions meant to jumpstart the economy. First, there's "Operation Twist." The Fed will attempt to push down long-term interest rates by purchasing $400 billion in Treasury securities with six to 30 year terms. The program will last for nine months-through June 2012.

But here's the clever part: the Fed will sell shorter-dated Treasuries in exchange for bank reserves. This will prevent the Fed from having to expand its balance sheet to purchase longer-term Treasury securities. The relative increase in short term rates should be small, since short-term Treasuries are in high demand....

The Fed announced another policy change as well. It has been reinvesting its maturing principal in additional Treasury securities. The central bank will refine that approach by investing maturing principal from its agency bonds and mortgage-backed securities in additional agency mortgage-backed securities. In this way, it will keep the size of its mortgage securities exposure level. But more importantly, this action will also increase the demand for mortgage-backed securities, which should push down mortgage interest rates.

The Medicine the Housing Market Needs?

In fact, the major target for all of the Fed's new action appears to be the U.S. housing market. Both Operation Twist and the new MBS reinvestment policy should help to push down mortgage interest rates. And they're low already: this week Freddie Mac reports the average 30-year mortgage interest rate at just 4.09%. Through the Fed's new policy, rates should easily dip below 4%.

Operation Twist could also help the reinvestment policy to have a more dramatic effect: as mortgage interest rates begin to decline, we should see mortgage refinancing soar. That means more maturing principal, which will provide even more capital for the Fed to reinvest in MBS to push down mortgage interest rates even further....

But Will It Boost the Economy?

b If mortgage interest rates decline significantly, then we'll almost certainly see more refinancing occur. That will provide a little bit of stimulus. Some Americans will lower their monthly mortgage payment. The impact that this has on the economy depends on how much these payments are lowered and how many people take advantage of the opportunity. That additional money they'll have can then be spent to stimulate the economy.

c What's less clear, however, is whether or not the very low mortgage interest rates will lead to more home sales. Over the past year, even though interest rates were extremely low, they weren't enough to push more buyers into the market. Will even lower rates do the trick?

If home sales do increase, then prices may begin to stabilize-at least for a time. If the market isn't near the bottom, then once interest rates begin rising again, sales could decline and prices could begin to drop again. This is what we saw when the home buyer credit created a temporary burst of demand.

What we probably won't see is a significant increase in construction. The market still has plenty of existing inventory to work through before more homes are needed. So unless home demand truly explodes, we shouldn't expect a tidal wave of construction jobs.

As always, the effectiveness of the Fed's policy relies on the willingness of consumers, banks, and businesses to play along. First, Americans will need to seek refinancing and home purchases. Then, the banks must be willing to provide the credit for those new loans. If that encourages more spending due to consumers having more money in their pockets, then firms could begin hiring more aggressively. That's the plan-we'll see if it works.

Source: Daniel Indiviglio, "Will the Fed's New Policies Revitalize the Housing Market?" The Atlantic, September 24, 2011. Reprinted by permission of The Atlantic Monthly Group.