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Annual percentage change in average UK house prices (Source: adapted from https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2021/May.pdf) (a) With reference to the chart, which one of the following is true? Average UK house prices: A fell in August 2020 B fell in November 2018 C rose the fastest in May 2021 D stayed constant in 2018 (b) With reference to the chart on the previous page, explain the likely impact of an increase in average house prices on UK consumption. - Edexcel - A-Level Economics A - Question 2 - 2022 - Paper 2
Question 2
Annual percentage change in average UK house prices (Source: adapted from https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2021/May.p... show full transcript
Worked Solution & Example Answer:Annual percentage change in average UK house prices (Source: adapted from https://www.nationwide.co.uk/-/media/MainSite/documents/about/house-price-index/2021/May.pdf) (a) With reference to the chart, which one of the following is true? Average UK house prices: A fell in August 2020 B fell in November 2018 C rose the fastest in May 2021 D stayed constant in 2018 (b) With reference to the chart on the previous page, explain the likely impact of an increase in average house prices on UK consumption. - Edexcel - A-Level Economics A - Question 2 - 2022 - Paper 2
Step 1
With reference to the chart, which one of the following is true?
Answer
Upon evaluating the chart, it becomes evident that the only correct statement is C: 'rose the fastest in May 2021.' In August 2020, house prices actually increased, making option A incorrect. For option B, prices rose in November 2018, thus making it false as well. Lastly, option D is incorrect as house prices underwent fluctuations throughout 2018 rather than remaining constant.
Step 2
With reference to the chart on the previous page, explain the likely impact of an increase in average house prices on UK consumption.
Answer
An increase in average house prices can significantly impact UK consumption through several mechanisms:
Wealth Effect
As house prices rise, homeowners experience an increase in their wealth, which can lead to higher spending. This is because homeowners may feel more financially secure and thus more likely to increase their consumption.
Consumer Confidence
Higher house prices can enhance consumer confidence, leading to more significant expenditures in various sectors, including housing improvements and other durable goods.
Mortgage Equity Withdrawal
Homeowners might also tap into increased equity from their properties, using these funds for personal spending or investments.
Contextual Reference
Referring to the chart, in November 2018, house prices saw a 2% increase, which likely contributed to greater consumer activity during that period.
In conclusion, the rise in average house prices fosters a conducive environment for increased consumption through wealth effects, heightened consumer confidence, and mortgage equity withdrawal.