QUESTION 66 (5 marks)
House prices fall after a monetary tightening, but the number of dwellings and households’ current wages are unchanged. Explain two channels through which household consumption could still fall. Distinguish a financial wealth change from a change in physical housing capacity.
Practice marking scheme
Answer
Lower perceived wealth and weaker collateral can reduce spending without fewer physical houses.
Working
Owners may feel poorer and increase saving, lowering consumption. Lower property values may also reduce collateral available for borrowing, constraining credit-financed spending. The same dwellings remain, so this is a change in asset valuation rather than a physical reduction in productive or housing capacity. Responses vary with debt, liquidity and confidence.
Marking criteria
- Explains the wealth channel. [2 marks]
- Explains the collateral/credit channel. [2 marks]
- Distinguishes asset prices from physical capacity. [1 mark]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.