Solution-Encourage new home purchases

Encourage new home purchases

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Reference no: EM132407226

Through monetary policy, now termed QE 3, the Federal Reserve System is purchasing $40 billion of mortgage securities (bonds) per month. The FED is paying top dollar for the mortgages, expecting mortgage companies to use the funds to finance new home purchases; thereby, increasing economic activity. Once the economy heats up and interest rates begin to rise, the price of the mortgages bought by the FED will fall and the FED will lose money (inverse relationship between the price of a debt instrument and the rate of interest. So far, this policy has had little effect on home sales. Would it make more sense for the FED to loan money directly to home buyers at zero percent interest (or even with a subsidy) to encourage new home purchases if this activity would result in losses no greater than those expected from QE 3?

Reference no: EM132407226

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Encourage new home purchases

Reference no: EM132407226

Reference no: EM132407226

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