Bubble bursts-consumer demand for new homes drops sharply

Reference no: EM13695932

Assume now that the housing bubble bursts and consumer demand for new homes drops sharply. We model this as a negative aggregate shock a=-2%. Assume also that at the same time risk in the economy goes up as well increasing risk premium to 5%. What is the optimal response for government in this case?

Reference no: EM13695932

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