Question

What would be the effect on the equilibrium price and equilibrium quantity of new housing if mortgage interest rates rise and the costs of building a house rise simultaneously?

a. The equilibrium price will fall, but the equilibrium quantity cannot be predicted.
b. The equilibrium price and the equilibrium quantity will fall.
c. The equilibrium price will rise and the equilibrium quantity will fall.
d. The equilibrium price cannot be predicted, but the equilibrium quantity will fall.

Answer 1

The correct answer is c. The equilibrium price will rise and the equilibrium quantity will fall.

Step-by-step explanation:

The law of demand and supply states that, whenever the price of a good increases, the quantity demanded of that good decreases and whenever the price decreases, the quantity demanded increases.

In this example, the cost of building a house rises, so does the price of the house. This change will affect the demand curve, and less houses will be demanded. In addition, the cost of buying a house has increased due to increased mortgage interest rates. Both effects push prices up and quantity demanded down.