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Mathematics & Economics
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Policy Memo. Consumer Confidence Slumps as Home Prices Decline for Sixth Straight Month

Coursework Instructions:

 

Final Project: Scenario Two
The date is 05/20/2021. You were hired six months ago by your congressional representative as a policy advisor. Your boss has been very impressed with your insight and research, and has promoted you to be the primary economic policy advisor!
As you are reading the economic news today, you come across the following headline: “Consumer Confidence Slumps as Home Prices Decline for Sixth Straight Month”.  The article is discussing how households feel less wealthy as a result of a decline in home prices. Because roughly 50% of household wealth is the value of their home, a sudden decrease in the price they can potentially sell their home for if they needed to makes them suddenly less wealthy. As a result, households are spending far less of their incomes. As an additional problem, uncertainty about how much more home prices might go down has lead to a decrease in people buying new homes (remember that new home purchases are included in GDP, but not in the “C” component of the GDP formula).
You go out and collect the following information:
Macroeconmic Indicator Value of the indicator Source of the Indicator
Current output $14.42 Trillion Congressional Budget Office (“CBO”)
Est. full employment output $16 Trillion CBO
Current rate of unemployment 9.9% Bureau of Labor Statistics (“BLS”)
Est. natural rate of unemp. 5.5% CBO
Current inflation rate -0.1% BLS
Target rate of inflation 2% Federal Reserve
Current Fed Funds rate 2.1% Federal Reserve
Current MPC 0.95 CBO
Current Reserve Requirement 25% Federal Reserve
Your congressman is concerned about the current state of the economy. Your job is to prepare a Policy Memo to fully brief your congressman about the current state of the economy. Your Policy Memo should 1) explain the current state of the economy, 2) Identify both a fiscal policy solution and a monetary policy solution, 3) describe the potential down-side to those policy solutions, and 4) make a final policy recommendation.

Coursework Sample Content Preview:
Final Project: Policy Memo
interoffice memorandum
To:


From:


Subject:

Consumer Confidence Slumps as Home Prices Decline for Sixth Straight Month

Date:

cc:

Mary Q. Facilitator



The current state of the economy:
Consumer confidence in the US has plummeted, and home prices have also declined for six straight months as the economy has contracted. Consumer confidence is a useful indicator of consumer sentiment on expectations about the economy, and a high unemployment rate indicates that the aggregate demand has declined. The drop in consumer confidence indicates that the job outlook is not encouraging and the decline in house prices further shows that there is a slowdown in demand for houses. The slump in housing prices is a concern as 50% of household wealth is the value of their home. Thus, lower house prices decrease the homeowners' wealth, and this, in turn, decreases their ability to borrow and consume. The current rate of unemployment is 9.9%, the estimated natural rate of unemployment is 5.5%, and the current inflation rate is -0.1%%, while the target rate of inflation is 2%. 
Fiscal policy solution and a monetary policy solution
The current concern is a decrease in household wealth based on the value of their homes and reduced consumer expenditure.
Fiscal policy solution
Fiscal policy can be understood as a set of measures related to public spending and the tax regime. Fiscal policies affect the balance of the government's spending and income programs and the taxpayers' disposable income. As there is high unemployment, tax revenues are likely to have plummeted as consumption and transactions have decreased. Fiscal expansion through tax cuts and increased government spending are preferred to keep the economy afloat.
Tax Multiplier=-MPC1-MPC=-0.950.05=-19
As the tax multiplier is −19, and a $100 tax decrease will increase the real GDP by $1900
Updated on
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