Consider the Spanish economy in 2007 and 2008. Why would a drop in house prices most likely cause a recession? In your answer, please consider the impact on (1) Spanish households and consumption; (2) availability of credit; (3) foreign investment, and (4) employment in the economy.

Exhibit C: House Prices in Spain House Prices, Annual Change (%) 20 15 10 -5 -10 -15 00 '05 '10 15 21 Nominal Real Source: INE, Global Property Guide Exhibit D: Spanish Household Debt to Income Ratio (in percent) ES 8 40 3 1980q3 1998q1 2015q3Exhibit E: Current Accounts in Europe The current account is in surplus % of GDP 10 Germany 5 Italy Spain France -5 UK -10 2006 07 08 09 10 11 12 13 14 15 16 17 forecast Exhibit F: Impact of real estate-related activities on GDP Figure 2 Impact of real estate-related activities on GDP (percent) by country China 25% U.K. 20% Japan Spain . US 15% Germany Korea Netherlands Ireland 1997 1998 1999 2000 2001 2002 2003 2004 2095 2006 2007 2008 2009 2010 201 1 2012 2013 2014 2015 2016 2017 -US. -U.K. - Germany - France - Spain -Finland Netherlands -Japan -Korea IrelandExhibit G: Unemployment Unemployment is twice the eurozone average % 30 25 20 15 Spain 10 Italy France 5 UK Germany 2006 07 08 09 10 11 12 13 14 15 16 17 Exhibit H: GDP GDP is set to return to 2008 levels Real levels, rebased to Q2 2008 110 UK Germany 105 France 100 Spain 95 - Italy 90 2006 07 08 09 10 11 12 13 14 15 16October 25, 2006 FOMC statement For immediate release Share The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace. Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.December 11, 2007 FOMC statement For immediate release Share The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent. Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time. Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully. Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner, Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting. In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis