Question

What will be the impact on the U.S. residential housing market equilibrium price and quantity, if the interest rate is kept at a historically low level but the unemployment rate is still high? Based on your answer, what will be the impact on the U.S. real GDP? Please indicate which macroeconomic model (classical, Keynesian, monetarist, or rational expectation) will support your answer.

Answer 1

Fall in the interest rate would not cause a rise in the housing sector. The low-interest-rate causes problem of the liquidity trap. Thus, low-interest rates can not affect the economy positively. Further, the high unemployment rate would not motive the more buying of houses. Workers would be less confident about the economy. They would not be ready to buy more at a lower interest rate. Low-interest rate fund shall be used only when worker expects that future economic system is going to be more favorable only.

Further, the Keynes believes that recession can be corrected through the fiscal policy. The expansionary fiscal policy would drive up the aggregate demand. The rise in aggregate demand will push the economy towards the full employment level. The rise in the government expenditure would cause a direct rise in income and employment.