Ib Economics Commentary - Aggregate Demand

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This article covers the first increase in housing prices in Australia in 2011, raising hopes that Australian housing prices may recover in 2012. Housing prices have also dropped, but recently, the average cost for a house has also risen. The article states that this is mainly because of low interest rates and shortage of supply.

Low interest rates (charges that borrowers pay to lenders for using the borrowed money), would cause a shift in demand (the capability and willingness to consume a commodity at a given price at a given time) to the right (from D to D1). The reason for this is because consumers are predicted to borrow more money at lower interest rates (as the rewards for saving money are less than if interest rates were higher), which would therefore lead to an increase in spending. As a result, the equilibrium (when the supply of a commodity equals its demand, resulting in neither surplus nor shortage) would move from W to X – causing an increase in price (from P to P1).

Also, low interest rates would cause lower mortgage payments, which would deter homeowners from selling their houses (which is usually predicted during a recession). This would result in a decreased shift in supply (capability and willingness of suppliers to sell a commodity at a given price at a given time) of houses (from S to S1). As supply decreases, the equilibrium shifts from B to C, and price increases from P1 to P2. This decrease in supply has increased the capital city’s home value index by 0.1% from October to November, which is its first increase in a year.

The article forecasted decrease in house prices due to the interest rate rising; this is because the people save more money at higher interest rates. This shifts demand to the left (from D to D1) while homeowners might prefer to sell their houses at the higher mortgage rates, thus shifting supply to the right (from S to S1). These changes all result in the equilibrium changing from Y to Z and price falling from P...
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