Lower interest rates can lead to higher home prices, and this can lead to increased household spending since homeowners can spend this additional equity. If you were a lender, is there any danger in making loans to homeowners for this new equity or are these really risk-free loans since they are secured by the equity in the house?
What will be an ideal response?
There is some risk. If lower interest rates can increase the value of homes then certainly higher rates can lead to decreases in the value of a home. If a lender were to make a loan for the entire equity in the house, there is no cushion to fall back on if the value of the home were to decrease. It would seem that prudent lending should leave a cushion between the value of the home and the amount of the loan(s) against this value.
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If supply and demand both decrease, the new equilibrium price will be ________ and the new equilibrium quantity will be ________.
A. lower; lower B. higher; higher C. lower; uncertain D. uncertain; lower
Risk assessment
a. ignores relative risk among environmental goals b. deals with choosing from among alternative risk responses c. assures a fair and equitable risk burden among segments of society d. is concerned with the qualitative and quantitative evaluation of risk
If a 50 percent increase in the price of pizza results in a 25 percent decrease in the quantity demanded of pizza, then the price elasticity of demand for pizza:
a. is equal to 0.5 and demand for pizza is inelastic. b. is equal to 0.5 and demand for pizza is elastic. c. is equal to 2 and demand for pizza is elastic. d. is equal to 2 and demand for pizza is inelastic. e. cannot be determined from the information provided.
The example of an inflationary gap in 2006-2007 suggested that the economy adjusts
a. rapidly to inflationary gaps by lowering prices. b. rapidly to inflationary gaps by raising prices. c. slowly to inflationary gaps by lowering prices. d. slowly to inflationary gaps by increasing inflation.