Joe wants to buy a studio apartment, so he plans on applying for a mortgage loan. If the price level increased by 8%, due to ____________, (all else equal) Joe will be _________ to purchase a studio apartment. the wealth effect cancelling the interest rate effect; as likely as before the wealth effect; more likely the interest rate effect; less likely the international trade effect; less likely the interest rate effect; more likely
Question
Joe wants to buy a studio apartment, so he plans on applying for a mortgage loan. If the price level increased by 8%, due to ____________, (all else equal) Joe will be _________ to purchase a studio apartment.
the wealth effect cancelling the interest rate effect; as likely as before
the wealth effect; more likely
the interest rate effect; less likely
the international trade effect; less likely
the interest rate effect; more likely
Solution
the interest rate effect; less likely
Here's why:
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The interest rate effect refers to the impact of changes in the price level on the interest rates. When the price level increases, it leads to higher interest rates.
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Higher interest rates make borrowing more expensive. In this case, if Joe wants to apply for a mortgage loan to buy a studio apartment, the increase in interest rates will make the loan more expensive.
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As a result, Joe will be less likely to purchase a studio apartment because the cost of borrowing has increased.
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Therefore, the correct answer is: the interest rate effect; less likely.
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