Actual Question: Examine the macroeconomic implications brought by the fall of house prices inthe UK, combined with the change of its Monetary Policy.

With this question, we can simplify it into these questions:

• Discuss how the falling house prices impacted the country’s economy

• Discuss how the change in country’s monetary policy changed its economy

• Discuss how the above two changes interact

Q: What is the effect of high-interest rates?

The cost of borrowing money increases when it has a higher interest rate. As a result,borrowers with mortgages only have a small amount of disposable income. Borrowers, especially credit card users, would also have a reason to use theircredit cards less. This reduces the consumption of users. The fall inconsumption rates will cause a decrease in Aggregate Demand and reduce economicgrowth. A reduction in Aggregate Demand would also affect inflation rate.

Explore the impacts of applying the Euro to UK’s monetary and financial policy?

When you see this question, you may stop reading on the “applying the Euro” part and just write the usual cost and benefit of the Euro. Unfortunately, this does not answer thequestion since it is asking for the impact of the Euro on Britain’s financial andmonetary policy.

Macro-evaluation

• Status of the economy – Is the economy running smoothly or is it undergoing a recession?

• Timedelays – It can take about 24 months before

• Othervariables present – High imports could be an indicator of high consumer spending.

• Impacts offactors – Low exports to the US only amounts to a small percentage of the UK’s Aggregate Demand. However, if recession falls in Europe, it can spell troublefor the UK because 50% of its exports are sent to EU member countries.

• Impacts of macroeconomic objectives – interest rates can influence inflation rates; but, it can also be influenced by other factors like unemployment and economicgrowth.

• Impact ofsupply and demand – An expansionary policy can reduce demand-deficient unemployment rates. However, it cannot solve demand-side unemployment.

Micro-evaluation

• Impact is determined by the elasticity of the demand- Using the example of oil prices, if the demand is price inelastic, the demand only reduces a little bit because oftax. However, if the prices are elastic, th tax will cause a higher fall inthe demand.

• Time lag –At first, the demand for petrol is likely to remain price inelastic. However,the demand may decrease as consumers find alternatives.

• Status ofthe market structure – If the world market continues to be competitive, pricesmay remain low. However, if one country dominates, high oil prices are a given.

• List ofbusiness objectives – If an oil company aims to maximize profits, their pricesare going to increase. However, if it wants to maximize their market share, prices may be lower even if it means low profit.

• Behavioral economics – How can the behavior of individuals or groups regarding an issue influence them and their economic choices?