Case Studies Questions

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2 Case Studies Questions CASE STUDY ONE Part A According to the statistics presented above, the housing market in the United Kingdom is seeing tremendous growth in terms of both the number of complete homes on the market and the prices of such homes. According to the statistics, the typical cost of a home in the United Kingdom rose from 180,000 pounds in 2013 to 250,000 pounds in 2014, which indicates a favorable influence from the previous year. The figures show that there has been a rise in demand for housing in the United Kingdom but that there has also been a comparable decrease in the number of new homes that have been created to meet that demand. There were 1.04 million home sales in 2013, but there were 1.13 million in 2014, representing an increase in the number of homes sold over the previous year. Restrictions on the construction of new residential houses may also cause the rising demand for housing in the United Kingdom. Part B The first item that should be brought to everyone's attention is that there has been a clear divergence in the path that the trends of prices and quantities have taken over time. Although the inflation rate has been more or less stable, there has been a significantly more significant shift in the available amounts. This discrepancy is likely attributable to the underlying factors determining pricing and quantities. Likely, wage growth, inflation, and changes in interest rate swings are the key forces behind price shifts. When any of these characteristics are present in significant quantities, often, there will be an accompanying increase in expenses. On the other hand, there are additional components that can function as a counterbalance to these patterns. For

3 example, prices would typically decrease if there were an excess supply of properties on the market. On the other hand, Quantities are affected by external factors like the rise in population, the rise in the number of residences, and the rise in the number of new buildings constructed. When there is a significant growth in the population, there will be a greater demand for homes, which will lead to an increase in the prices of such properties. On the other hand, if there is a considerable quantity of new construction, it may be simpler to supply demand and easier to keep pricing under control. This might be a positive for both parties. It is possible that a combination of factors is to blame for the difference that may be noticed between pricing and volumes. These aspects may include robust population growth and relatively low levels of new development. Because of this, there is a solid demand for housing, which has increased prices. In contrast, quantities have varied as a direct reaction to fluctuations in the rate at which population expansion occurs. PART C When the housing market is not functioning, as it should, it is the responsibility of the government to devise several strategies and solutions to assist in the upkeep of a stable housing market. People with low incomes and those buying their first house will benefit from the government's deployment of a specialized support system that will be made available on the market. The government is required to pursue this strategy due to the significant influence it will have on the housing market as a whole. On the other hand, governments can implement monetary policies, which involve the utilization of money or other resources owned by governments, to assist in promoting borrowing and investments in the housing market. Monetary policies are an example of a mechanism that involves the utilization of money or other resources

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4 owned by governments. In addition, they have the authority to pass rules and regulations, in addition to making recommendations, the major goal of which is to preserve the current state of the housing market by putting an end to any price shifts that may have occurred. CASE STUDY TWO Part A When a person spends more money on products and services than what is produced, this is an example of inflation. The decrease in available supply, which results in increased manufacturing costs, is the root reason for the recent increase in the cost of commodities. On the other hand, those purchasing things can gain from an expanding economy. Consequently, consumers deplete the extra cash flow much more rapidly than producers can expand the number of products and services they offer ( Bean , 2016). Price hikes are the inevitable consequence of either of these two scenarios. To bring inflation under control, the government of the United Kingdom employs a wide array of techniques; nevertheless, these strategies are only moderately effective. The government's goal is to bring inflation under control. The following is an example of one of these tactics that is more effective than the others are, but it comes at a larger price in terms of the collateral damage it causes. Certain goods are subject to price controls that the government of the United Kingdom enforces. On the other hand, pay limits are introduced in cycles alongside price controls to mitigate the impact of wage push inflation. Although oil prices are at an all-time high around the globe, the government of the United Kingdom is continuing to execute a restrictive monetary policy to preserve price stability. By boosting interest rates, the policy makes it possible to reduce the amount of money circulating throughout the economy ( Bean , 2016). Increasing the interest rates

5 on loans gives the government the ability to restrict the economy's growth. As a result, firms and individuals spend less money, reducing the quantity of money available for spending. PART B According to Hatzius et al (2010), fiscal policies provide the government with an easy way to assist with monetary policies to lower inflation and decrease the risk of maintaining a stable financial state. The United Kingdom's government should prioritize aiding the most vulnerable citizens in coping with the high cost of food and energy. At the same time, the government should avoid adding to aggregate demand, which might double inflation. The central bank should think about fiscal consolidation, which involves putting a limit on debt and allowing interest rates to rise to cut demand and keep inflation under control ( Hatzius et al, 2010). The government should seriously consider displaying alignment against the backdrop; parliamentarians are accountable for giving robust safeguards to those in need while simultaneously looking for other ways to earn extra income to bring the overall deficit down. When implemented where necessary, fiscal consolidation demonstrates that policymakers are aligned against inflation. PART C In the past, the Bank of England has had a great deal of success in bringing inflation in the United Kingdom under control, which is discussed in this section. The central bank sets an annual target for inflation that it hopes to keep at a certain level and it pays a great deal of attention to this objective throughout the year. In the case that rates of inflation grow to a level that is greater than the objective set by the central bank, a variety of various measures will be implemented in order to bring it back down. In the context of this discussion, adopting other

6 strategies, such as "quantitative easing," is meant to be understood as "raising interest rates." One of the most important facets of this measure is that it enables gradual changes rather than sudden changes, which can result in more problems than they solve. This is one of the most important reasons why this measure is so important ( Reeves and Sawicki 2017, p.220). According to Reeves and Sawicki ( 2017 , p.225), for instance, if you suddenly increase interest rates by 100 basis points, those borrowing money from banks may not be able to afford their payments, and they may default on them. This could harm the economy as a whole. This would lead to unfavorable consequences. On the other hand, if you raise interest rates gradually over time with smaller increases each quarter or month until they reach your target level, this problem will occur less frequently because there is less risk involved at each step along the way. This can be accomplished by gradually increasing the interest rates over time with smaller increases each quarter or month until they reach your target level. It is possible to achieve this goal by gradually raising the interest rates over time. Part D The yearly growth rate is currently at 11%, making this the highest significant increase recorded in the UK since October 1981. The provision of services to people and dwellings, such as electricity and gas, puts inflationary pressure on the economy. However, this increase is restrained by growing energy prices so that the inflationary pressure could be better. The interventions carried out by the government were the cause of the inflation rate not reaching 13% as it had been projected to. The Monetary Policy Committee of the Bank of England adopted a target inflation rate of 2% to support greater employment ( Treasury , 2013). The committee responsible for monetary policy is expected to make major advancements in terms of fiscal policy. Because of the action taken by the government, there is now a reduced sense of

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7 unpredictability regarding the future cost of the many different kinds of energy. In addition to this, the committee will decide on the appropriate interest rate that should be in place in order to fight inflation. CASE STUDY THREE Part A The economic and financial crisis that started in the late 2000s, according to Charles and Fontana (2011, p.100 ), was a crucial issue that played a big impact in modifying and restructuring the financial services business. The Financial Services Modernization Act (FSM Act) was the driving force behind the adaptation of financial institutions to the new rules and regulations. This act affected the financial system by introducing an increase in systematic risk. The transition from the banking model of originating and holding to that of originating to distribute has increased the systemic risks. The traditional approach requires financial institutions to accept deposits for shorter periods in addition to other sources of capital and then use this money to provide loans to customers and businesses with longer repayment terms. This contrasts with the more modern approach, which encourages financial institutions to accept deposits for longer periods. Because banks typically hold on to these loans until they mature, they have incentives to continue monitoring and screening their borrowers' conduct for a considerable amount of time after the loan has been provided. On the other hand, the traditional banking model exposes the financial institution to the possibility of issues regarding liquidity, interest rates, and credit. These issues could be detrimental to the firm's operations. Banks switched to underwriting procedures that resulted in warehoused or originated loans and then swiftly sold them to reduce their exposure to potential risks and achieve better return-risk tradeoffs. These new strategies led to the loans being warehoused or created ( Charles

8 and Fontana 2011, p.100 ). They also improved the return-risk tradeoffs because of taking this action. The vast majority of big banks have transitioned into acting as money-holding service corporations to accommodate better new sorts of activity. Because of these advancements, the risk was moved from the financial institutions' balance sheets to the bank's financial systems, resulting in the risk being removed from the balance sheets. When acting as an underwriter, the Financial Institutions were not subject to the credit risks, liquidity threats, or interest rate risks typically associated with traditional banking. Because of this, the Financial Institutions were motivated to check and keep an eye on the actions of the borrowers to whom they originated loans. There needed to be an inability on the part of financial institutions to carry out their responsibilities as risk-measuring professionals. PART B The shift that financial institutions were taking away from their role as risk measurement and management specialists was made more difficult by the rise in the value of the property market in the early and middle years of the 2000s. They were put in a position where they had to deal with several new challenges as a direct consequence of this (Campbell 2013, p.20). One of the issues they had to deal with was that their customers were increasingly interested in employing the products they sold for reasons different from those the producers had originally intended. For example, if a financial institution had offered a mortgage designed to be used for the purchase of a home only, it would not have been possible for many customers to use the same mortgage for other purposes, such as refinancing an existing loan or purchasing a vehicle. This is because the mortgage was only intended to purchase a home. On the other hand, if the financial institution had offered a mortgage just intended to be utilized for buying a house, then it would have been conceivable to accomplish what you set out

9 to do. If it had occurred before the housing bubble burst, this action would have been regarded as appropriate by a good number of lenders (Campbell 2013, p.26). However, because of the decline in housing prices and the subsequent loss of many people's homes, it started to appear as though there were few options left for people who required one type of loan but were unable to obtain one because another type of loan was more lucrative at that time. These individuals needed a loan but needed help because another type of loan was more profitable. This is because, during that particular period, one sort of loan was more lucrative than the other type of loan. Part C The United States, Japan, and China were the countries in 2021 that had the biggest total quantities of outstanding international debt securities. This is because these countries have the most robust economies on the entire planet and, taken together, are the most significant issuers of debt securities. In addition, their financial markets are extensive and well-developed, making it simpler for them to access global capital and fulfill their requirements for borrowing money by issuing international debt securities. Their financial markets are large and well developed. Debt securities are liabilities that can be traded and must be repaid in full to the investor at some point in the future (together with interest). Debentures, bonds, deposits, and notes are all used interchangeably to refer to debt securities (Gruic and Wooldridge, 2012). It is not considered to be within the scope of this category to include loans that are easily received through a financial institution such as a bank. PART D Although there are many different sorts of banks, the most widespread type is the commercial bank. Commercial banks also have the greatest asset bases. Customers in business settings and individual consumers make up the bulk of the commercial banking industry's

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10 clientele for the various goods and services provided by commercial banks. Customers can obtain loans from them, deposit money with them, manage their funds, and purchase a wide variety of other financial items from them. In that order, the United States of America, China, and Japan are home to the most significant commercial banking institutions in the world. The United Kingdom is home to the least significant commercial banking institutions in the world (3rd place) ( Pasiouras and Kosmidou, 2017, p.230) . China has four commercial banks with assets worth more than one hundred billion dollars, Japan has three, and India has two commercial banks with assets worth more than one hundred billion dollars each.

11 References Bean, C.R., 2016. Globalisation and inflation. Bank of England Quarterly Bulletin, winter . Campbell, J.Y., 2013. Mortgage market design. Review of finance , 17 (1), pp.1-33. Charles, A. and Fontana, G., 2011. A critical assessment of the financialization process and its impact on the US labour force during the great recession. International Journal of Public Policy , 7 (1), pp.97-111. Gruić, B. and Wooldridge, P.D., 2012. Enhancements to the BIS debt securities statistics. BIS Quarterly Review December . Hatzius, J., Hooper, P., Mishkin, F.S., Schoenholtz, K.L. and Watson, M.W., 2010. Financial conditions indexes: A fresh look after the financial crisis (No. w16150). National Bureau of Economic Research. Pasiouras, F. and Kosmidou, K., 2017. Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance , 21 (2), pp.222-237. Reeves, R. and Sawicki, M., 2017. Do financial markets react to Bank of England communication? European Journal of Political Economy , 23 (1), pp.207-227. Treasury, H., 2011. Reforming Britain's economic and financial policy: towards greater economic stability . Springer.

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