3. Residential Investment. The financial crisis in 2008 was driven largely by an unsustainable boom in the housing market. In this problem, we'll use what we know about housing stock and flow to partially explain the boom. a.) What is the difference between the terms stock and flow? b.) The figure below displays the market for housing and the supply of new housing. Typically in supply and demand graphs, the y-axis measures the price of a particular good. In this case, we consider the relative price of housing to the overall price level. Why is this the case? (a) The Market for Housing (b) The Supply of New Housing Relative Supply P /P price of Supply housing, P /P Demand Stock of housing capital, K, Flow of residential investment, 'H c.) The figure also shows a vertical supply of housing stock and an upward sloping housing flow. What does this imply about the relationship between the relative price of housing and the housing stock? What about the relationship between the relative price and the housing flow? Why do the housing stock and housing flow differ in this way? d.) During the housing boom, banks expanded mortgage lending (loans for home purchases) to unprecedented levels. Show on the graph the effect this had on the housing market. What happened to the relative price of housing? What about the 2 flow of residential investment? (Hint: this would constitute an expansion in the availability of credit.)