Start with the no arbitrage equation for housing considered at the end of chapter , Rd=−PHt −δPHt +r+PH(t+1) , where R is the interest rate in a bank account, d is the required down payment, PtH is the price of a house at t, δ is depreciation, and r is rent.
• Derive the equation given in the book for the price of a house in terms of rent, the interest rate R, the down payment, and capital gains.
• According to this model, if the Fed controls R, what could the Fed have done to reduce housing prices in the run-up to the Great Recession?