ECON545 Project 1 Microeconomic Analysis

Economic Principles

Student’s Name

Professor’s Name

Institution

Date

Situation D

On considering a shift from his corn growing business that Uncle Dan has been engaged to for many years, his option to move to a more profitable housing market, several factors need to be given a deep insight and consideration. These factors are of great importance in understanding this market better and knowing the risks and benefits that await entrance in the housing market. Understanding the market is important since it prepares one for the many challenges that could be awaiting one in the future and the transition phase from one business activity to the other. Understanding the market should be the guidance in making shifts from one business to venturing in another one. After reading the article “Will the Fed’s New Policies Revitalize the Housing Market?” on pages 896 of the textbook, the following are the deductions I made about and the future of the housing market and the economy and they would form the basis of my advice to Uncle Dan;

GDP Growth Rate

The Feds aim at coming up with measures to revitalize the economy. Revitalization of the economy is aimed at making the economy healthier than it is at the moment. Making the economy healthy would mean a positive transition in terms of GDP. The revitalization of the economy is expected to have a direct impact on the different factors of GDP that include; the consumption and expenditure at individual levels, investment in business activities and ventures, increased expenditure by the government and increased export of goods and services (Cheng, 2001).

The “operation twist” and the new MBS reinvestment policy are expected to have a positive impact by enhancing growth in the GDP. As one of the factors in GDP, this means that the rate of personal spending on purchasing new houses would increase. An increase would mean that Uncle Dan’s new plan to invest more in the housing sector would end up producing very positive and high returns just as he expects of the housing alternative new business venture (Sullivan, 2003).

Since the economy is expected to register positive economic growth through the GDP, people are more likely to invest in businesses either through starting up new businesses or expanding the already existing businesses. The shops that Uncle Dan would build would, therefore, have people to invest and startup new businesses. These people would pay rent to Uncle Dan, and this way, his income and profits would be increased (Grossman, 1995).

The plan by the Fed’s that would see positivity in the GDP of the economy provides a positive background and one that is highly promising for Uncle Dan’s new investment plan and a shift in the direction of the housing market would be profitable for him.

Interest Rates

The interest rates are another factor that needs to be considered. Could be that Uncle Dan requires some borrowing in his new venturing plan in the housing market. According to the plan by the Fed's, they plan to implement two policies and these are Operation twist and MBS reinvestment policy. These two are expected to have a direct effect on the mortgage interest rates. According to these plans by the Fed's, the new mortgage rates should be well under or below 4%. This would mean that Uncle Dan's would be facilitated by many people having access to mortgages to buy new houses (Sullivan, 2003).

The plan by the Fed's would motivate people to take up mortgages t buy new homes. Uncle Dan's new-built homes would, therefore, find a market full of buyers who have an exchange of what is required to have a new home. Low-interest rates on a loan attract people to take up loans. The risks associated with low-interest rate loan are the greatest motivation towards people taking up the loan (Cheng, 2001).

This way, I would advise Uncle Dan to build the homes since the plan by the Fed's would be a tool for encouraging people to want to acquire more loans to buy the houses. The presence of ready buyers of the houses means a positive future for his new business plan and venture.

Level of Unemployment

Employment levels are the key determinant of the spending levels of the people. When the level of unemployment goes high, the disposable income by the people reduces and this has a direct effect on any other factor in the economy. Without employment, the GDP doesn’t grow since the consumption level is low.

At the moment, firms are barely hiring new employees. This could be because their rates of consumption are low, the rates of investment and expansion of existing businesses is low, and the rate of export and production is low. The increase in the GDP as stated earlier is expected to have an impact on all these factors that are determinants of employment and hiring by firms. If the GDP increases, the employment rates are also expected to increase and so will be the rate and amount of disposable income by individuals. They would be able to save more and to invest more in the newly built houses. People would also be able to save and startup new businesses (Grossman, 1995).

The employment rates may be experiencing depression, and they may be at high levels but there is a promising and a positive future for the employment sector. Since all other factors that affect it are expected to transform positively, so it is going to be for the employer new homes.

The Business Cycle

The business cycle in the past year hasn’t been a very promising one. This is because low-interest rates that are expected to have a direct effect on the purchase on new homes did not have an effect on the purchase rates. The mortgage rates required to buy new homes were relatively low and despite this, the number of people who bought new houses and homes was tiny.

The new rates of mortgage rates are relatively lower compared to those of the previous year. The lower rates are expected to be a motivating factor for buyers. Since the future could see an increase in mortgage rates, people are likely and are expected to take advantage of this aspect to take up mortgages and buy new homes. The levels of uncertainty that the rates of purchase of new homes are low and the low rates are meant to serve as a motivation. This translates to a bright future for Uncle Dan's plan of building

Fiscal Policy

The government’s policies on spending are positive and highly supportive of the new plan by the Fed’s. The government has been of the position and has shown its support for the refinancing of and an increase in mortgages. The government is expected to respond positively to the new plan of the Fed's since it hasn't indicated any negative signs about the plan earlier. The idea that the administration of president Obama has been advocating is meant to enhance and stabilize the housing sector, and so is the plan and objective aimed at by the Fed's (Larch, 2009).

Monetary Policy

The central Bank plans to invest from or through agency bonds and mortgage-backed securities. These actions by the central bank are aimed and directed towards enhancing the demand for mortgages and subsequently reduce the rates of interest of mortgages. A reduction in mortgage rates would mean increased borrowing and subsequent increment in the rate of purchase of new houses. The monetary policy sounds and predicts a positive and highly promising future for the government. The monetary policy prepares a bright and promising future for the industry that Uncle Dan aims at investing. The housing market might not be performing positively at the moment, but the current monetary policy by the central government provides a very positive future for the housing market. The actions by the central bank, the Fed's and the government are aimed at creating stability in the housing market (Larch, 2009).

International Trade

International trade has been on the increase in the past few years. Technology among other factors integrated altogether has been a factor for increased international trade. International trade promises a bright and very positive future. An enhanced international trade would mean increased production for export and subsequent increase in the employment rates in firms. Hiring and increase in employment opportunities mean increased disposable incomes by individuals and families. The disposable income would be used to purchase new homes and hence, the housing market would benefit greatly from increased international trade (Sullivan, 2003).

Demographics

There seems to be an increase in the middle class in the population and subsequently, there is an increase in the population of people not only in the country but also worldwide. Increased populations call for an increase and expansion in the housing industry. An increasing middle class also predict a positive future for the housing industry (Larch, 2009). The middle class is well able and capable of purchasing new homes, and they are also expected to live in new homes according to their living standards and placement in the society. This translates to a positive and promising future for the housing industry (Grossman, 1995).

Recommendations

After taking a close look at the nature and the status of the housing market and its probable future, I would recommend the following to Uncle Dan;

Since the mortgage rates are likely to reduce, there is likely to be an increased demand and access to mortgages by individuals. This is going to enhance access to and increased purchase of houses. Uncle Dan should take up this prediction and probability to build new houses. The low rates of mortgages are expected to motivate people to go for the mortgages and buy new homes (Grossman, 1995).

The GDP is likely to increase and, therefore, people are more likely going to invest more. More businesses are likely to spring up, and the existing ones expanded. The shops that Uncle Dan intends to build are, therefore, likely to lend more and this way, Uncle Dan will have income and profits will be generated (Larch, 2009).

Demographics shows that the future is bright for the housing market and the demand for houses and homes is ultimately expected to arise and increase. Since its projected that more houses will be required in future, Uncle Dan's idea of turning his former corn growing activity into a house building one is likely to have positive returns.

I would like to recommend and advise Uncle Dan to go ahead and take up and implement his idea of building houses and shops in his farm. The housing industry is likely to be revitalized by the Fed’s plan and this way, Uncle Dan would be able to make bigger profits.

References

Cheng, L. (2001). Global Production and Trade . Boston: Springer US.

Grossman, G. (1995). Handbook of International Economics. Amsterdam: Elsevier.

Larch, M. (2009). Fiscal Policy Making in the European Union. Routledge.

Meredith, G. (2002). Managing by defining moments: Innovative strategies for motivating 5 very different generational cohorts. New York: Hungry Minds Inc.

Sullivan, A. (2003). Economics : principles in action. Needham: Prentice Hall.