The paper “ Advanced Macroeconomics - Imperfections, Institutions, Policies” is affecting variant of the math problem on macro & microeconomics. This dynamic process will go on until the housing price level reaches a level where the construction process is just enough to offset the depreciation of the existing housing stock making the stock of housing remain constant. Whereas an upward shift in housing demand is fully absorbed by the rise in house prices in the short run, in the long run, it will cause an increase in the housing stock which will dampen the initial price increase. Question four-Use the model above to demonstrate the expression of the long-run value of housing price and housing stock.
Comment on this expression. SolutionWhere Y is +ve, H& rare -ve This process goes on until housing prices reach a level that construction activities are just sufficient to compensate for the wear and tear of pre-existing houses stock consequently the supply remains constant throughout as below: Question five-Suppose now that the government permanently raises the property tax rate t. Use your expressions from Question 4 to derive the long-run effects on pH and H of a marginal increase in it.
Use a diagram like the one you constructed in Question 3 to illustrate the effects of the property tax increase in the short run (where the housing stock is predetermined) and in the long run when the housing stock has fully adjusted to the tax increase. Illustrate the gradual adjustment of the market to the higher property tax and provide a verbal explanation of the adjustment process. SolutionBased on the theory that states ceteris paribus, higher interest rates will reduce the market price of housing.
This is because interest rates have a positive correlation on the housing investment. An increase in the property tax rate will increase the construction cost index decreasing the housing stock since it will no longer be profitable to the investors to increase the housing supply. However, the tax increase being a permanent one will imply that the housing equilibrium will remain constant both in the short run and long run. Hd0H*Hd1HH0 Housing supply in the Long runWhereas an upward shift in housing demand is fully absorbed by a rise in housing prices in the short run, it causes an increase in housing stock which dampens the initial price increase.
Advanced Macroeconomics-Imperfections,Institutions ,Policies. (2003-2009). © Raimondas Kuodis, 2003-2009. Visos teisės saugomos. Kaip naudotis svetaine.
ekonomika.org. (2003-2009). Advanced Macro ecomics. Retrieved March Friday, 2014, from www.ekonomika.org: http://ekonomika.org/
-Jacobsen, S. W. (2010). Business cycles-Investment and Asset Pricing. In Introduction to Advance MacroEconomics. McGraw Hill Publisher.