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Total points are 10. 1 Money Supply and Housing Prices (10 points) Following the dot-com crisis in 2001 the US Federal Reserve lowered interest rates (increased money supply) substantially. Usually, commercial banks rise capital for mortgages by issuing commercial bank bonds and selling them in the capital market. Falling interest rates at various bond maturities lead to lower mortgage rates for home buyers. This was a contributing factor in the rush of housing prices around the world. House prices collapsed in the USA around 2007 leading to the 2008 Financial crisis. In this assignment we would look at housing prices in several countries: Canada, USA, Australia, Norway, and Germany. We work with "International House Price Database" assembled by the Federal Reserve Bank of Dallas at https://www.dallasfed.org/institute/houseprice#tab2. Download "Third Quarter 2023" release of the database. The data are in the Excel file. a) Analyze the behavior of Real Housing Price Index (RHPI) for Canada and the US from 1975 Q1 to 2023 Q3. Plot the two series on the graph and discuss the pattern that emerges. Do real house prices behave similar in Canada and the USA?/nb) One possible explanation for the divergence in real house prices could be due to a divergence in incomes. Analyze the behavior of the Real Personal Disposable Income (RPDI) over the same period. Plot the two series on the graph and discuss the pattern that emerges. Is behaviour of disposable incomes similar to behavior of house prices in the two countries?/nc) Another way to look at the relationship between house prices and disposable income is divide RHPI by RPDI. Divide RHPI by RPDI and plot the behaviour of house prices relative to income on the graph over the same period as in (a) and (b). Discuss what you see. d) To get a better perspective on Canadian house prices, compare the behaviour of RHPI for Canada, Australia, Germany, and Norway over the same period. Do the four series behave similarly? What can explain the similarity?

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