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Bus 2203 Written Assignment Unit 2

University Of the People

Principle of Finance
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Bus 2203 Written Assignment Unit 2

The United States monetary policy caused critical concern from the past decade,

especially from 2002 to 2006 financial periods. One of the most critical concerns of a real estate

bubble is that growing demand forces people to take loans to buy houses that they can't afford.

But according to the author, aspect for the U.S monetary policy there were many factors that

were responsible for the biggest financial crisis that happened around 2000's. (Dokko, J. et al,

2009).

The factors include: (1) Low rates accompanied increase in demand for housing, (2)

Loose versus tight monetary policy, (3) Taylor Rule, (4) Policy assessment and outcomes, (5)

Rise of cheap and available credit stimulated housing demand, (6) Evaluate monetary policy by

how effective it is in attaining goals, (7) Evidence that monetary policy played a role by the

timing of housing boom, (8) Evidence that monetary policy played a role by economic

simulation models, and (9) Evidence that monetary policy played a role by other research.

(1) Low rates accompanied increase in demand for housing

Low interest rates cause a rise in house demand since borrowing is more affordable. The

author claims that the correlation between interest rates and housing activity is insufficient to

account for the increase in home prices. However, it increased as more people made investments

in purchasing and selling homes. (Dokko, J., et al., 2009)

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(2) Loose versus tight monetary policy

"Lowering interest rates and encouraging borrowing are two effects of a loose monetary

policy, also referred to as an expansionary monetary policy. On the other hand, a tight monetary

policy, often known as a contractionary monetary strategy, boosts interest rates and reduces

borrowing in the economy " (Lumen Learning, n.d.)

(3) Taylor Rule

An economic model known as the Taylor rule determines interest rates based on the

operating targets of the Federal Reserve, as well as the rates of GDP and inflation. According to

Taylor's rule (1993), many central banks were following their own rules, which caused them to

perform worse than what Taylor's rule would predict.

(4) Evaluate monetary policy by how effective it is in attaining goals

There was scant evidence that the housing boom could have been significantly

contributed to by U.S. monetary policy (Dokko, J., et al., 2009). I think that the monetary policy

does not have an immerse effect regarding to the rising of house price or demands.

(5) Evidence that monetary policy played a role by the timing of housing boom
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The timing of the housing boom is affected by a number of things. Most people believed

that the boom started in 1998, and that following the crisis of 2001, the pace of house

appreciation picked up significantly after 2002.

(6) Evidence that monetary policy played a role by economic simulation models

Computer-solved models of the economy are known as economic simulation models, but

no economic model is ever a perfect representation of reality. The expansion of account deficits

most likely only had a minor impact on monetary policy. (Dokko, J., et al., 2009)

For instance, not all models in use today were able to forecast the worldwide currency crisis that

started in 2008. In order to link existing equations, additional modifications are made.
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Reference

Dokko, J., Doyle, B., Kiley, M., Kim, J., Sherlund, S., Sim, J., & Van den Heuvel, S. (2009,

December 22). Monetary Policy and the Housing Bubble. Federal Reserve Board. Retrieved

November 24, 2021, from

https://www.federalreserve.gov/pubs/feds/2009/200949/200949pap.pdf

Lumen Learning. (n.d.). Macroeconomics [deprecated]. Lumen. Retrieved September 15, 2021,

from https://courses.lumenlearning.com/macroeconomics/chapter/monetary-policy-and-

economic-outcomes/.3