The motivation of this dissertation is to enable us to have a better understanding of the global financial crisis which was triggered by the property bubbles in the America. Did the American adopt the Classical school of thoughts or the Keynesian school of thoughts before the whole property bubbles exploded? The Classical theory was originated by economist Adam Smith. Adam Smith introduced the idea of "invisible hand", where it assumes individual knows what is best for himself make decision that is at his best interest, and market forces of demand of supply will return to equilibrium prices and output. Classical theory assumes that the various markets in the economy, including financial markets, labor markets, and markets for goods and services, must function smoothly and without impairments such as minimum wages and interest rate ceilings. For example, if government imposed minimum wages, business owner may end up employing fewer workers, which in turn increase the unemployment rate. Classical theory also assumes that wages and price must adjust quickly to match quantities demanded and supplied. (ABC pg42, et al )
For the Keynesian school of thoughts, the theory was originated from economist John Maynard Keynes. Keynesian school of thoughts, on the other hand, assumes that wages and price adjust slowly by itself. Unlike Classical theory, Keynesian school of thoughts believes that the economy will perform better if the government deploys the right tools such as fiscal expansion, monetary expansion or a combination of both. I will talk into greater details what will government usually do during a fiscal expansion and monetary expansion.
With a brief introduction of the 2 major macroeconomics' theory, I would like assume that the government is aware of the property bubble forming across the United State of America and I will position myself as the government of the country and deploy the AS/AD macroeconomics' model to prevent the bubble from ballooning. I will introduce the concept of this model in the later part of my paper.
If the government is aware of the bubbles in the property market, it doesn't take a rocket scientist to figure out the use of the AS/AD model to help cool down the market. Mr.Alan Green Span has said in 2004 that prices in the property market may be escalating in some states, but he do not see a property bubbles form across the whole of America. The American government was too focused on the expansion of its economy instead of cooling the already over-heating economy. The whole purpose of this paper is to provide a quantitative analysis using Econometric to run a regression to determine if there was indeed bubble forming in the property market. If there were sights that bubbles is forming in the property market, and the AS/AD model was not properly executed, one cannot help but to think that there could be a conspiracy among the financial market and the government and it leads us to think that greed must be doing its work for all these mess.