How would a two percent rise in interest rates most likely affect the market for new housing?

• A. It would increase the supply of new housing.
• B. It would decrease the demand for new housing.
• C. It would have no effect on the demand for new housing.
• D. It would increase the demand for new housing.

Answer: (B)

Verified step by step guidance

1. Understand the relationship between interest rates and the housing market: Interest rates affect the cost of borrowing money, which is crucial for purchasing new homes, especially when buyers use mortgages.
2. Analyze how a rise in interest rates impacts buyers: When interest rates increase, the cost of financing a home (monthly mortgage payments) becomes more expensive, which tends to reduce the willingness and ability of buyers to demand new housing.
3. Consider the demand curve for new housing: A higher interest rate shifts the demand curve to the left, indicating a decrease in demand because fewer buyers can afford or are willing to buy at the previous prices.
4. Evaluate the supply side: Interest rates primarily affect demand rather than supply in the short run, so the supply of new housing is unlikely to increase as a direct result of higher interest rates.
5. Conclude that a two percent rise in interest rates most likely decreases the demand for new housing, as higher borrowing costs discourage potential buyers.