Principle of Economics Ponzi Scheme

Questions: 1. A bubble. A Ponzi scheme. Please define these two concepts as they apply to the housing market, giving full details of any sources you use. 2. New building approvals are growing at an impressive clip. Complete the diagram below explaining the consequences of the above scenario on the Australian housing market.3.Deregulation in the financial sector provoked increased competition to write loans. Explain how this scenario can increase economic welfare.4.What is an oligopoly and why is the Australian banking sector referred to as a cosy oligopoly? (Give full details of any source you use.) Answers: 1. Ponzi scheme is an investment scheme that provides incomes of former investors because of finances recognized from later investors. There has always been a false impression regarding the fact that Ponzi scheme is a sort of financial pyramid. However, both of these approaches are examples of dishonest investment schemes. The schemes pretend to be critical organization promising high profits in a short period. Most of the banks in Australia have treated the housing market as a Ponzi scheme (Colozza, Marmi and Nassigh 2015). The banking system in Australia has improved a continuous growth model. This shares an equal risk profile as a Ponzi or a pyramid scheme. On the other hand, according to Gjerstad and Smith (2014), an economic bubble is a circumstance in which individuals trade in goods. They also trade resources for amounts that are larger than their natural values. When the price of houses increases due to increase in demand, it leads to housing bubble, in the face of limited supply. 2. Figure: Australian housing market (Source: Created by Author) The graph illustrates that due to bubble that leads to increase in the housing prices, the supply for houses are likely to decrease as the supply curve shifts from S to S1. According to the article, the property prices in Sydney largely depend on the balance between supply and demand of housing. Increase in prices in Sydney has been impressive over the last two years. That in turn led to slower economic growth. 3. Deregulation of the financial sector is mostly taken to indicate the variety of legislative as well as economic events. Deregulation is likely to increase economic welfare, as it is able to deregulate savings as well as deposit rates. It also removes lending controls and opens the financial markets up to a higher competition. This will in turn generate billions of dollars of advantages to the savers of Australia. Deregulation has also led to considerably greater competition, loyalty, and reality of the financial system. Proceeding to deregulation, governments sought to use the banking system. This is to achieve objectives of monetary policy (Korinek and Kreamer 2014). 4. An oligopoly is a structure of the market that comprises of small number of firms that has a greater part of market share. An oligopoly is equal to that of monopoly however; there are more than one firm that controls the market. The banking sector is mostly considered as a cosy oligopoly where the individuals in Australia turn their back on smaller lenders (Beena 2014). The banking sector in Australia is not under a competitive market structure as a lesser number of firms mostly control the banking industry. References Beena, P.L., 2014. Mergers and Amalgamations: An Analysis of the changing structure of Indian Oligopoly. Colozza, T., Marmi, S. and Nassigh, A., 2015. Sovereign Debt Ponzi-Schemes and Credit Risk in the EMU. Gjerstad, S.D. and Smith, V.L., 2014.Rethinking housing bubbles: The role of household and bank balance sheets in modeling economic cycles. Cambridge University Press. Korinek, A. and Kreamer, J., 2014. The redistributive effects of financial deregulation.Journal of Monetary Economics,68, pp.S55-S67.