This has profound implications for equilibrium gas prices, including the idea that gas should sell for some fixed proportion to oil based on the Btu value of the two fuels.
The market won't reach equilibrium until housing prices bottom and the financial sector shows signs of recovery.
To bring the ratio of prices to rents back to equilibrium, either rents must rise sharply or prices must fall.
Although DSGE models are also based on microeconomic foundations, they accept the traditional view that there exists some ideal equilibrium towards which all prices are drawn.
The supply of real estate is fixed in the short term, so increased demand from a few optimistic investors will push prices above their equilibrium level.
An equilibrium of full employment, stable prices and adequate domestic savings was never experienced.
To the extent that this happens gradually over a period, inflation may be reduced, but only until prices reach their new, lower equilibrium level.
For investors holding bonds yielding 9%, lower rates will mean that demand for access to those 9% interest payments will drive bond prices higher as the market moves to equilibrium with current rates.
In each case there is an equilibrium price the stock will return to, as if stock prices have memories.
When artificial prices are set, supply and demand fall out of equilibrium.
By suppressing long-run interest rates, the Fed is distorting asset prices, including housing prices that need to fall to restore long-run equilibrium.
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In the meantime, demand is likely to grow in a variety of sectors, prices will rise, and a longer-term price equilibrium will eventually kick into place.
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