In 2013, the U.S. housing market appeared to be improving, and many analysts began to wonder what effects, if any, the recovery might have on
U.S.economic activity during the rest of the year. The prevailing sentiment was that rising home prices would increase homeowner wealth and stimulate a surge in consumer spending.
Use the Three-Sector Model to determine the effects that increased U.S. housing prices should have on U.S. real GDP, GDP Price Index, real and nominal exchange rates (U.S. dollars relative to euros), quantity of U.S. dollars or euros traded per period, real risk-free interest rate, quantity of real loan able funds per period, M2 money multiplier, and nominal interest rate. Use both graphical analysis and brief explanations to support your answers. Assume the United States: (1) has a flexible exchange rate, (2) faces highly mobile international capital markets, (3) is in the intermediate range of its aggregate supply curve but relatively close to the Keynesian range, and (4) government currently has a budget deficit.