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Homework answers / question archive / Discuss the channels by which the property price bust may have implications for macroeconomic variables of interest to policy makers (for example, output, unemployment, the exchange rate, and the current account balance)

Discuss the channels by which the property price bust may have implications for macroeconomic variables of interest to policy makers (for example, output, unemployment, the exchange rate, and the current account balance)

Economics

Discuss the channels by which the property price bust may have implications for macroeconomic variables of interest to policy makers (for example, output, unemployment, the exchange rate, and the current account balance). Do you think that the current fiscal and monetary policy stances are appropriate to tackle the issues? What policies would you recommend going forward, and what are the potential drawbacks of these policies? (You can assume that property prices will continue to decline for the next 2-3 years.)

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The concept focuses on the influences and requires attention to the interaction of the cycle in property price and other aspects of corporate borrowing. It is worth noting that changes in assert price can negatively impact the process of financial intermediation resulting in asset-price fluctuation which have significant impacts for the central banks in the role of the custodian of financial stability. Furthermore, take note that the rising assert price could lead to increased expected inflation in the short run where the central bank's main role to preserve the stability of the financial system. Whereas this role is deemed to be the regulatory policy, it is urged that monetary policy is very critical in such circumstances. In particular, changing the interest rates by the central bank directly alters the probability of an asset-price bubble bursting, where the optimal use of monetary policy to influence the path of the bubble could result in inflation deviating from the central bank's target in a short term.

For instance, the increase of prices in real-estate results in collateral for additional loans, which stimulates credit growth and prolongs the upswings system of the business cycle. It is however important noting that increase in price results in unsustainable which could cause the disappearance of collateral leading to huge losses for financial institutions and other firms. This could result in slowdown in economic activities. It is therefore critical that you carefully examine the channel involved the property price burst by analyzing the actual and potential implication on various macroeconomic variables.