The increase in interest rates raised the cost of borrowing, which meant consumer and investment spending will fall. The equation AD = C + I + G + (X – M) equates the aggregate demand and the GDP of an economy, therefore the rise in interest rates have resulted in aggregate demand and GDP decreasing. The downwards slope of the aggregate demand curve (AD) is a result of three things – the net export effect, the real balance effect and the interest rate effect. The net export effect being the cause of this situation where the price level (inflation) reduces the aggregate demand of economy as a fall in net exports (X- M – exports [X] and imports [M] bit of the equation) puts the real balance effect in play. The increase in price levels acts to cut down consumer spending and maintain their bank balances which finally results in the interest rate effect – an increase in prices creates more demand for borrowing resulting in higher interest rates. Conversely, as a result of all three effects, the growth rate of global liquidity [] has fallen – banks have no cash to land as the decrease in borrowing has cut down the money they gain from the interests put on the different types of loans of which a type is mortgage. The occurrence of this situation (falling mortgage rates) is a solution to the falling GDP. The mortgage rates have been dropped which is likely to increase aggregate demand which overall will also increase real GDP and reduce unemployment.
Otherwise, there many exogenous factors that affect mortgage rates amount of down payment, the income of the mortgage borrower, total mortgage loan amount, the life of the mortgage rate and many others however there are limited factors that are significant to this situation – the income of the borrower and the duration of the mortgage rate. The income of the borrower is an essential requirement and has great affect on the interest rates as it determines if the consumer is able to pay back what they borrowed. The duration of the interest is essential (very significant to this situation) – the long term interest rates have also been decreased as this will help bring up the consumer confidence (consumers feel they are being offered a low interest rate for a long term). In final analysis, the decrease in mortgage rates is caused by the action to increase the aggregate demand which had fallen because of inflation.
Mortgage rates down for 2nd week
Freddie Mac cites weakening economy for easing of long-term rates.
By Lara Moscrip, CNNMoney.com contributing writer
November 13, 2008: 1:05 PM ET
SOURCE – CNN MONEY
NEW YORK (CNNMoney.com) -- Mortgage rates fell for the second week in a row, finance firm Freddie Mac said Thursday, as the weakening economy resulted in the slowest pace of home purchase applications in nearly eight years.
Freddie Mac said 30-year fixed-rate mortgages averaged 6.14% this week. That's down from 6.20% last week and below the 6.24% rate at this time last year.
Rates for 30-year fixed-rate mortgages have been at 6% or higher for five consecutive weeks. Between the week of Oct. 9 and Oct. 16, the 30-year fixed-rate mortgage posted its biggest weekly jump since April 1987, rising from 5.94% to 6.46%
"Long-term mortgage rates fell slightly this week as signs the overall economy is weakening brought interest rates down market-wide," according to a statement by Frank Nothaft, Freddie Mac vice president and chief economist.
…
On Thursday, the head of the Senate Banking Committee said banks receiving money as part of the $700 billion federal bailout must increase their lending to businesses and consumers.
Banks are failing to use public funds to make credit more available and to help troubled homeowners, said Sen. Christopher Dodd, D-Conn.
A recent survey of senior loan officers from the Federal Reserve found that about 70% of banks raised their lending standards for prime mortgages, and about 90% of banks that offer nontraditional mortgages did so as well.
In September, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) were on the brink of failure, having racked up nearly $12 billion in losses from declining home prices, mortgage delinquencies and foreclosures.
Federal officials assumed control of the firms and the $5 trillion in home loans they back. The Treasury put up as much as $200 billion to bail them out and placed them in a temporary "conservatorship" overseen by the Federal Housing Finance Agency.
-- CNNMoney.com senior writer Tami Luhby contributed to this report.
The total demand for output of all goods and services usually compared to price levels
The total amount of output supplied by all producers in an economy all together usually compared with price levels
The ability to have ready access to invested money by an economy or the ability of a market to accept large transactions (the flow of money)