IB Economics IA - Commentary 2 (Mortgage Rates Down)

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Mortgage rates down

The global financial crisis is multiplying its effects to many sectors of the economy beginning with failures of large financial institutions of United States. The effects of this crisis have been prominently been visible with some factors such as large reductions in stocks, higher inflation rates, higher unemployment rates, and numerous bank failures.

The decrease in mortgage rates has been a result from the chain cycle of the global financial crisis that has been following on. To begin with, higher inflation rates have had adverse effects on the economy. It has caused more risk averse and has discouraged investment and saving which in turn has caused consumer confidence to go down. Therefore, price inflation has caused the power of money to go down as consumers have to spend more for the same product/result. Overall, the consumers want to borrow more attempting to cut down their spending (loss of consumer spending), however no changes (specifically increases) had been made to the money supply thereby the interest rates had increased. Following on, this cause has resulted in falling sales and commodities.

This graph illustrates the basic Aggregate Demand [] (AD)/Aggregate Supply [] (AS) model and AD curve has fallen resulting in prices falling. This change has occurred following high prices level (inflation) - because of oversupply of money. Because of high prices, the value of money has decreased resulting in AD falling. This has also caused the National Income to drop, unemployment and interest rates to increase.

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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) ...

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