Question

Following the global financial crisis, mortgage rates reached record-low levels by $2013$ and again in $2016$ .

a. What effect should this have had on the economy, according to the household liquidity effect channel?

b. During much of this time, most banks raised their credit standards significantly, making it much more difficult to qualify for home loans and to refinance existing loans. How does this information alter your answer to part (a)?

Short answer

Part (a): A reduced cost of borrowing raises the value of a home, resulting in higher household income.

Part (b): According to the household liquidity effect channel, if no one can apply for the credit, even though the interest rates are falling, economic misery would persist, and spending on consumer durables and dwellings could suffer as a result.

Step-by-step solution

 Part (a): Concept Introduction.

During a phase of economic turmoil, competent consumers reduce overall spending on acquired products and commodities, resulting in an international economic meltdown

Part(a): Explanation of solution.

A reduced cost of borrowing raises the value of a home, resulting in higher household income. Rising home assets would lower the likelihood of financial turmoil and boost consumer spending on consumer durables and residential.

Part (b): Concept Introduction.

During a phase of economic turmoil, competent consumers reduce overall spending on acquired products and commodities, resulting in an international economic meltdown.

Part(b): Explanation of solution.

If no one can apply for the credit, even though the interest rates are falling, it'll have a negative impact on building home assets. As a result, economic misery would persist, and spending on consumer durables and dwellings could suffer as a result.