Question 1:

As was clear from general news reports, the world-wide crises and recession of the later part of the first decade of the 21st century resulted from the issuance large quantities of of high-risk, zero-downpayment mortgages to householders in the United States and the bundling of those mortgages into derivative securities that were widely purchased by major banks and financial institutions both in the U.S. and in the rest of the world. When the U.S. housing market turned down and large quantities of those mortgages became of lower value than the houses they were attached to, house owners simply walked away, leaving the lending institutions and everone holding securities that were liabilities of those institutions with huge losses.

It turns out the the Canadian financial institutions, being more carefully regulated, were not much burdened with securities that declined in value as a result of those mortgages. As an exercise, analyse the effects on the Canadian price level, monetary aggregates and money multiplier of these developments using the data in the Excel spreadsheet-file pmbsdata.xls For those who use Gretl, the Gretl data file pmbsdata.gdt is also provided.

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