IMPACT OF RISE IN INTEREST RATES AND A FALL IN HOUSE PRICES ON UK CONSUMPTION

Question 1

POINT ONE - THE IMPACT OF INTEREST RATES RISING SHOULD RESULT IN A FALL IN CONSUMPTION + THIS IS BECAUSE + THEREFORE + LRAS DIAGRAM

Answer 1

The impact of interest rates rising should result in a fall in consumption, this is because households with mortgages may find the costs of repaying the mortgage will increase resulting in a fall of disposable income, therefore a fall in consumption, this can be represented by the diagram below (LRAS DIAGRAM)

Question 2

POINT TWO - HOWEVER FIXED MORTGAGES

Answer 2

However, a growing number of households have fixed mortgage rates which mean that they don’t change with interest rates, this means disposable income won’t be affected therefore consumption is unaffected

Question 3

POINT THREE - A FALL IN HOUSE PRICES RESULTS IN A..

Answer 3

A fall in house prices results in a negative wealth effect, the wealth effect links asset prices to consumption. As asset change in value consumption may also change. As house prices fall, households less likely to spend as no longer have security of their house price, as they are not as secure financially this creates a negative wealth effect.

Question 4

HOWEVER - CONSUMER CONFIDENCE

Answer 4

However, consumer confidence could be really high, if consumers think that they could be receiving a pay rise or if they think the economy is going to be strong, they will have a high consumer confidence therefore a fall in house prices will not affect them