Analyze the equilibrium in the market

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1. Discuss informally what you would expect to see in a model of the housing market like the one presented in class, but in which people form expecta- tions of future house price changes by extrapolating from price changes in the recent past.

2. Consider a model of the housing market like the one presented in class, but in which the holders of housing are not rationally forward looking, but rather are always optimistic. (This is true, by the way.) In particular, housing owners always believe that housing prices will rise at some rate E(p?) = k. Analyze the equilibrium in the market. How do the steady state levels of h, p, and rent compare to the regular model. Show how the effect of a permanent increase in the rate of population growth differs between this model and the regular model.

Reference no: EM13926062

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