Assignment 1:

Explain the consequences of the drop in rate to the economy"

Mortgage rates dropped again this week, with the 15-year fixed-rate loan hitting a record low, according to a report from mortgage financier Freddie Mac.

The 15-year fixed rate fell to 2.56% from 2.61%. A year ago, it stood at 3.07.

The most popular mortgage, the 30-year fixed rate, came in at 3.35%, a drop of 0.05 percentage point and only 0.04 percentage point above its record low set the week of November 21, 2012.

The rates provide a welcome boost to the housing market and to the overall economy, according to Frank Nothaft, Freddie Mac's chief economist.

"Residential fixed investment added to overall economic growth over the past eight consecutive quarters and contributed more than 0.3 percentage points in growth over the first three months of this year," he said. "[N]ear record low mortgage rates should further drive the housing market recovery over the near term."

The news came a day after the Fed announced that it would keep buying up to $85 billion in mortgage-backed securities and Treasuries a month. "There was a chance that the Fed would start to taper their purchases as summer approached," said Keith Gumbinger, of HSH.com, a loan information provider. "But that is starting to look less likely, given the still-soft state of the economy. Odds favor that the programs will continue until much later in the year, so mortgage rates should continue to be available at fantastic rates."

Low rates help existing homeowners even if they don't refinance their homes. Affordable loans boost homebuyer demand, sending home prices higher. They've recorded a 9% gain over the past 12 months, according to the S&P/Case-Shiller home price index. The added home values mean some homeowners will no longer be underwater on their mortgages and can cash in the extra equity should they run into a rough financial patch. They can also sell their homes without resorting to a short sale, in which the price paid is less than what they owe on their mortgages. That saves sellers from a big hit on their credit scores.

If homeowners do refinance, they often choose 15-year, fixed loans. They are popular with borrowers seeking to shorten their loan terms -- saving themselves on total interest payments. The record low rates enable them to do that without increasing their monthly payments very much.

Borrowers with three-year-old, 30-year fixed-rate loans at 5% would have a monthly payment of about $537 for every $100,000 borrowed, and would pay out a total of about $93,000 in interest over the course of the mortgage. Switching to a 15-year at 2.57% would increase the payment only to $670 a month but the total interest paid out would come to less than $21,000. Mortgage refinance applications rose 1.8% last week, according to the Mortgage Bankers Association, and account for about 75% of all applications for mortgages

Assignment 2:

Instructions:
Reading #2 "GM profit tops view as North America strong, Europe improves". Explain how GM profit will impact on the U.S. and global economy?

By Ben Klayman and Deepa Seetharaman

DETROIT (Reuters) - General Motors Co (GM.N) posted stronger-than-expected quarterly profit on Thursday as the U.S. automaker kept a tight grip on costs in its North American and European businesses. GM shares rose 3.6 percent to $31.27, near their initial public offering debut of $33 in the fall of 2010, and hit the highest point since July of 2011. The increase is welcome news for GM's largest shareholder, the U.S. Treasury, which acquired its stake after a taxpayer-funded bailout. Treasury, which says it will sell its remaining position over the next year, gains almost $250 million for every $1 increase in GM's stock price.

"GM, while still beset with issues, is generally executing better than investors give it credit for," Barclays analyst Brian Johnson said in a research note. The company still expects to return to breakeven by mid-decade in Europe, where it has reported 13 straight years of losses, said GM Chief Financial Officer Dan Ammann.

RBC Capital Markets analyst Joseph Spak welcomed the results, pointing to the company's ability to cut costs. "Better-than-expected results (in Europe) will be well received, giving investors confidence that progress is being made and breakeven by mid-decade is possible," he said in a research note. GM's smaller U.S. rival Ford Motor Co (F.N) last week posted a stronger-than-expected first-quarter profit on strength in North America, but overall costs spiked as it took steps to reinvest in its global lineup and shore up European operations. About $225 million in higher structural costs in the quarter stemmed from Ford's efforts to fix the European business after an economic downturn hit consumer demand for new cars.

'TOO SOON TO CALL A BOTTOM'

Ammann said GM doesn't see any signs of a turnaround in Europe. "It's too soon to call a bottom in Europe." Ford officials have said the European auto industry may see some stabilization toward year-end or early 2014. GM's first-quarter net income attributable to common stockholders fell 13.5 percent to $865 million, or 58 cents a share, from $1 billion, or 60 cents a share, in the year-earlier period. The company took a $400 million hit to earnings due to falling prices for its vehicles and weaker volume.

The latest quarter included a $162 million noncash charge for the devaluation of the Venezuelan currency. Excluding one-time items, GM earned 67 cents, topping the analysts' estimate of 54 cents, according to a poll by Thomson Reuters I/B/E/S. "We are much more of a formidable competitor now than we have been in more than a generation," Chief Executive Dan Akerson said on a conference call.

Revenue fell 2.4 percent from last year to $36.9 billion, and was just above the Wall Street target of $36.6 billion. GM's North American unit reported operating profit of $1.41 billion, better than the Wall Street estimate of $1.21 billion, according to FactSet StreetAccount. The result was down from a year ago due to higher costs from preparing plants for new vehicle launches, especially the redesigned Chevrolet Silverado and GMC Sierra full-size pickup trucks, as well as lower shipments because the plants were down.

The company also saw a $200 million drop in operating earnings as it was forced to offer pricing deals on its current large truck line ahead of the launch of the new models. Analysts have warned that a weaker Japanese yen and deteriorating European market will likely lead to more competitive pricing in North America. Japanese automaker Nissan Motor Co said this week it was cutting prices on seven models representing 65 percent of its U.S. offerings.

KEEPING COSTS FLAT

GM kept North American costs in the quarter flat, which was better than anticipated. In January, company officials said costs would increase this year. GM officials said while most of the expected increase in costs in North America will occur in the second and third quarters because of the new-vehicle launches, it will benefit from higher prices and lower incentives associated with the new cars and trucks.

RBC's Spak said the North American unit's 6.2 percent profit margin was stronger than the 4.7 percent he expected. Ford had a North American margin of 11 percent in the quarter. GM's loss of $175 million in Europe was smaller than the $469 million loss Wall Street estimated, according to FactSet. In the region, GM cut $300 million in costs and was able to keep the pricing on its vehicles unchanged, both better than anticipated. Ammann said GM will see cost savings in Europe slow as the year progresses, and Edward Jones analyst Christian Mayes said fixing its European operations will be "a long slog."

Morgan Stanley analyst Adam Jonas said in a research note that it was the first time GM's Europe unit topped Wall Street expectations in nearly two years and the first year-over-year improvement in results in five quarters. The international unit, which includes China, had an operating profit of $495 million, while South America recorded a small $38 million loss. Both results were weaker than expected. Ammann said strong results in China were offset by weakness in the rest of the international operations. He said the South America business is expected "to build" this year on last year's profit.

GM said adjusted free cash flow in the quarter was a negative $1.3 billion due mostly to the lower earnings and timing-related items that it said would reverse during the rest of the year. The Detroit automaker ended the quarter with total liquidity of $35.3 billion in its automotive business. Treasury officials declined to say whether the rise in GM's stock price could accelerate the sale of its remaining stake. According to GM's proxy, Treasury still owned more than 241 million shares as of April 17, so it would need to sell at an average of about $79.03 a share to break even. Federal officials said last week that Treasury had recovered about $30.4 billion of its investment in GM as of the end of March. In January, Treasury initiated a prearranged written trading plan to sell the rest of the stake. The government got an 18 percent GM stake following the $49.5 billion bailout in 2009.
(Reporting by Ben Klayman and Deepa Seetharaman; Editing by Jeffrey Benkoe)

Assignment 3:

Instructions:

1. Carefully explain why a typical demand curve slopes downwards.

2. Distinguish between normal and inferior goods.

3. What are the main underlying determinants of demand for the following:

i. Cars ii. Cloths iii. Healthcare