Tag: Bank of England

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UK house prices: why are they falling so little?

UK house prices have been falling in recent months. According to the Nationwide Building Society, average UK house prices in September 2023 were 5.3% lower than in September 2022. This fall reflects the increasing cost of owning a home as mortgage rates have risen. The average standard variable rate mortgage was 3.61% in August 2021, 4.88% in August 2022 and 7.85% in August 2023. A two-year fixed rate mortgage with a 10% deposit had an interest rate of 2.48% in August 2021, 3.93% in August 2022 and 6.59% in August 2023. Thus over two years, mortgage rates have more than doubled. This has made house purchase less affordable and has dampened demand.

But do house prices simply reflect current affordability? Given the large increase in mortgage costs and the cost-of-living crisis, it might seem surprising that house prices have fallen so little. After all, from September 2019 to August 2023, the average UK house price rose by 27.1% (from £215 352 to £273 751). Since then it has fallen by only 5.8% (to £257 808 in September 2023). However, there are various factors that help to explain why house prices have not fallen considerably more.

The first is that 74% of borrowers are on fixed-rate mortgages and 96% of new mortgages since 2019 have been at fixed rates. More than half of people with fixed rates have not yet had to renew their mortgage since interest rates began rising in December 2021. These people, therefore, have not yet been affected by the rise in mortgage interest rates.

The second is that interest rates are expected to peak and then fall. Even though by December 2024 another 2 million households will have had to renew their mortgage, those taking out new longer-term fixed rates may find that rates are lower than those on offer today. This could help to reduce the downward effect on house prices.

The third is that rents continue to rise, partly in response to the higher mortgage rates paid by landlords. With the price of this substitute product rising, this acts as an incentive for existing homeowners not to sell and existing renters to buy, even though they are facing higher mortgage payments.

The fourth is that house prices do not necessarily reflect the overall market equilibrium. People selling may hold out for a better price, hoping that they will eventually attract a buyer. Houses thus are taking longer to sell. This creates a glut of houses at above-equilibrium prices, with fewer sales taking place. At the same time, these higher prices depress demand. People would rather wait for a fall in house prices than pay the current asking price. This creates more of a ‘buyers’ market’, with some sellers being forced to sell well below the asking price. According to Zoopla (see linked article below), the average selling price is 4.2% below the asking price – the highest since 2019. Nevertheless, with sellers holding out and with reduced sales, actual sale prices have fallen less than if markets cleared.

So will house prices continue to fall and will the rate of decline accelerate? This depends on confidence and affordability. With interest rates falling, confidence and affordability are likely to rise. This will help to arrest further price falls.

However, with large numbers of people still on low fixed rates but with these fixed terms ending over the coming months, for them interest rates will be higher and this could continue to have a dampening effect on demand. What is more, affordability is likely to rise only slowly and in the short term could fall further. Petrol and diesel prices remain high and home energy costs and food prices are still well above the levels of two years ago. Inflation generally is coming down only slowly. The higher prices plus a rising tax burden from fiscal drag1 will continue to squeeze household budgets. This will reduce the size of deposits and the monthly payments that house purchasers can afford.

Over the longer term, house prices are set to rise again. Lower interest rates, rising real incomes again and a failure of house building to keep up with the growth in the number of people seeking to buy houses will all contribute to this. However, over the next few months, house prices are likely to continue falling. But just how much is difficult to predict. A lot will depend on expectations about house prices and incomes, how quickly inflation falls and how quickly the Bank of England reduces interest rates.

1 With tax thresholds frozen, as people’s wages rise, so a higher proportion of their income is taxed and, for higher earners, a higher proportion is taxed at a higher rate. This automatically increases income tax as a proportion of income.

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Questions

  1. Use a supply and demand diagram to illustrate the situation where house prices are above the equilibrium.
  2. Why does house price inflation/deflation differ (a) from one type of house (or flat) to another; (b) from one region of the economy/locality to another?
  3. Find out why house prices rose so much (a) in the early 2000s; (b) from 2020 to 2022.
  4. Find out why house prices fell so much from 2008 to 2010. Why was this fall so much greater than in recent months?
  5. Find out what is happening to house prices in two other developed countries of your choice. How does the current housing market in these countries differ from that in the UK?
  6. Paint possible scenarios (a) where UK house prices continue to fall by several percentage points; (b) begin to rise again very soon.
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Should central bank targets be changed?

Central bankers, policymakers, academics and economists met at the Economic Symposium at Jackson Hole, Wyoming from August 24–26. This annual conference, hosted by Kansas City Fed, gives them a chance to discuss current economic issues and the best policy responses. The theme this year was ‘Structural Shifts in the Global Economy’ and one of the issues discussed was whether, in the light of such shifts, central banks’ 2 per cent inflation targets are still appropriate.

Inflation has been slowing in most countries, but is still above the 2 peer cent target. In the USA, CPI inflation came down from a peak of 9.1% in June 2022 to 3.2% in July 2023. Core inflation, however, which excludes food and energy was 4.7%. At the symposium, in his keynote address the Fed Chair, Jay Powell, warned that despite 11 rises in interest rates since April 2022 (from 0%–0.25% to 5%–5.25%) having helped to bring inflation down, inflation was still too high and that further rises in interest rates could not be ruled out.

We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.

However, he did recognise the need to move cautiously in terms of any further rises in interest rates as “Doing too much could also do unnecessary harm to the economy.” But, despite the rises in interest rates, growth has remained strong in the USA. The annual growth rate in real GDP was 2.4% in the second quarter of 2023. Unemployment, at 3.5%, is low by historical standards and similar to the rate before the Fed began raising interest rates.

Raising the target rate of inflation?

Some economists and politicians have advocated raising the target rate of inflation from 2 per cent to, perhaps, 3 per cent. Jason Furman, an economic policy professor at Harvard and formerly chief economic advisor to President Barack Obama, argues that a higher target has the benefit of helping cushion the economy against severe recessions, especially important when such there have been adverse supply shocks, such as the supply-chain issues following the COVID lockdowns and then the war in Ukraine. A higher inflation rate may encourage more borrowing for investment as the real capital sum will be eroded more quickly. Some countries do indeed have higher inflation targets, as the table shows.

Powell emphatically ruled out any adjustment to the target rate. His views were expanded upon by Christine Lagarde, the head of the European Central Bank. She argued that in a world of greater supply shocks (such as from climate change), greater frictions in markets and greater inelasticity in supply, and hence greater price fluctuations, it is important for wage increases not to chase price increases. Increasing the target rate of inflation would anchor inflationary expectations at a higher level and hence would be self-defeating. Inflation in the eurozone, as in the USA, is falling – it halved from a peak of 10.6% in 2022 to 5.3% in July this year. Given this and worries about recession, the ECB may not raise interest rates at its September meeting. However, Lagarde argued that interest rates needed to remain high enough to bring inflation back to target.

The UK position

The Bank of England, too, is committed to a 2 per cent inflation target, even though the inflationary problems for the UK economy are greater that for many other countries. Greater shortfalls in wage growth have been more concentrated amongst lower-paid workers and especially in the public health, safety and transport sectors. Making up these shortfalls will slow the rate of inflationary decline; resisting doing so could lead to protracted industrial action with adverse effects on aggregate supply.

Then there is Brexit, which has added costs and bureaucratic procedures to many businesses. As Adam Posen (former member of the MPC) points out in the article linked below:

Even if this government continues to move towards more pragmatic relations with the EU, divergences in standards and regulation will increase costs and decrease availability of various imports, as will the end of various temporary exemptions. The base run rate of inflation will remain higher for some time as a result.

Then there is a persistent problem of low investment and productivity growth in the UK. This restriction on the supply side will make it difficult to bring inflation down, especially if workers attempt to achieve pay increases that match cost-of-living increases.

Sticking to the status quo

There seems little appetite among central bankers to adjust inflation targets. Squeezing inflation out of their respective economies is painful when inflation originates largely on the supply side and hence the problem is how to reduce demand and real incomes below what they would otherwise have been.

Raising inflation targets, they argue, would not address this fundamental problem and would probably simply anchor inflationary expectations at the higher level, leaving real incomes unchanged. Only if such policies led to a rise in investment would a higher target be justified and central bankers do not believe that it would.

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Questions

  1. Use an aggregate demand and supply diagram (AD/AS or DAD/DAS) to illustrate inflation since the opening up of economies after the COVID lockdowns. Use another one to illustrate the the effects of central banks raising interest rates?
  2. Why is the world likely to continue experiencing bigger supply shocks and greater price volatility than before the pandemic?
  3. With hindsight, was increasing narrow money after the financial crisis and then during the pandemic excessive? Would it have been better to have used the extra money to fund government spending on infrastructure rather than purchasing assets such as bonds in the secondary market?
  4. What are the arguments for and against increasing the target rate of inflation?
  5. How do inflationary expectations influence the actual rate of inflation?
  6. Consider the arguments for and against the government matching pay increases for public-sector workers to the cost of living.
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Monetary policy: too much, too late?

In this third blog about inflation, we focus on monetary policy to deal with the problem and bring inflation back to the target rate, which is typically 2 per cent around the world (including the eurozone, the USA and the UK). We ask the questions: was the response of central banks too timid initially, meaning that harsher measures had to be taken later; and will these harsher measures turn out to be excessive? In other words, has the eventual response been ‘too much, too late’, given that the initial measures were too little?

Inflation rates began rising in the second half of 2021 as economies began to open up as the pandemic subsided. Supply-chain problems drove the initial rise in prices. Then, following the Russian invasion of Ukraine in February 2022 and the adverse effects on oil, gas and grain prices, inflation rose further. In the UK, CPI inflation peaked at 11.1% in October 2022 (see chart 1 in the first of these three blogs). Across the whole EU-27, it peaked at 11.5% in October 2022; US inflation peaked at 9.1% in June 2022; Japanese inflation peaked at 4.3% in January 2023.

This raises the questions of why interest rates were not raised by a greater amount earlier (was it too little, too late?) and why they have continued to be raised once inflation rates have peaked (is it too much, too late?).

The problem of time lags

Both inflation and monetary policy involve time lags. Rising costs take a time to work their way through the supply chain. Firms may use old stocks for a time which are at the original price. If it is anticipated that costs will rise, central banks will need to take action early and not wait until all cost increases have worked their way through to retail prices.

In terms of monetary policy, the lags tend to be long.

If central bank interest rates are raised, it may take some time for banks to raise savings rates – a common complaint by savers.

As far as borrowing rates are concerned, as we saw in the previous blog, loans secured on dwellings (mortgages) account for the majority of households’ financial liabilities (76.4% in 2021) and here the time lags between central bank interest rate changes and changes in people’s mortgage interest rates can be very long. Only around 14 of UK mortgages are at variable rates; the rest are fixed, typically for between 2 to 5 years. So, when Bank Rate changes, people on fixed rates will be unaffected until their mortgage comes up for renewal, when they can be faced with a huge increase in payments.

Only around 21% of mortgages in England were/are due for renewal in 2023, and with 57% of these the old fixed rates were below 2%. Currently (July 2023), the average two-year fixed-rate mortgage rate in the UK is 6.81% (based on 75% loan to value (LTV)); the average five-year rate is 6.31% (based on 75% LTV). This represents a massive increase in interest rates, but for a relatively small proportion of homeowners and an even smaller proportion of total households.

But as more and more fixed-rate mortgages come up for renewal, so the number of people affected will grow, as will the dampening effect on aggregate demand as such people are forced to cut back on spending. This dampening effect will build up for many months.

And there is another time lag – that between prices and wages. Wages are negotiated periodically, normally annually or sometimes less frequently. Employees will typically seek a cost-of-living element in wage rises that covers price rises over the past 12 months, not inflation in the past month. If inflation is rising (or falling), such negotiations will not reflect the current situation. There is thus a time lag built in to such negotiations. Even if higher interest rates reduce inflation, the full effect can take some time because of this wages time lag.

Other time lags include those involving ongoing capital projects. If construction is taking place, it will take some time to complete and in the meantime is unlikely to be stopped. Higher interest rates will affect capital investment decisions now, but existing projects are likely to continue to completion. As more projects are completed over time, so the effect of higher interest rates is likely to accumulate.

Then there is the question of savings. During the pandemic, many people increased their savings as their opportunities for spending were more limited. Since then, many people have drawn on these savings to fund holidays, eating out and other leisure activities. Such spending is likely to taper off as savings are reduced. Again, the interest rises may prove to have been excessive as a means of reducing aggregate demand.

These time lags suggest that after some months the economy will have been excessively dampened and that the policy will have ‘overshot’ the mark. Had interest rates been raised more rapidly earlier and by larger amounts, the peak level of rates may not have needed to be so high.

Perhaps one of the biggest worries about raising interest rates excessively because of time lags is the effect on corporate and government debt. Highly indebted companies and countries will find that a large increase in interest rates makes servicing their debt much harder. For example, Thames Water, the UK’s biggest water and sewerage company accumulated some £14 billion in debt during the era of low interest rates. It has now declared that it cannot service these debts and is on the brink of insolvency. In the case of governments, as increasing amounts have to be spent on servicing their debt, so they may be forced to cut expenditure elsewhere. This will have a dampening effect on the economy – but with a time lag.

The distribution of pain

Those with large credit-card debt and large mortgages coming up for renewal or at variable rates will have borne the brunt of interest rate rises. These people, such as young people with families, are often those most affected by inflation, with a larger proportion of their expenditure on energy and food. Other people adversely affected are tenants where landlords raise rents to cover their higher mortgage payments.

Those with no debts will have been little affected by the hike in interest rates, unless the curbing of aggregate demand affects their chances of overtime or reduces available shifts or, worse still, leads to redundancy.

Excessive rises in interest rates exacerbate these distributional effects.

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Questions

  1. For what reasons might a central bank be unwilling to raise interest rates by more than 0.25 or 0.5 percentage points per month?
  2. What instruments other than changing interest rates does a central bank have for influencing aggregate demand?
  3. Distinguish between demand-pull and cost-push inflation.
  4. Why might using interest rates to curb inflation be problematic when inflation is caused by adverse supply shocks?
  5. How are expectations of consumers and firms relevant in determining (a) the appropriate monetary policy measures and (b) their effectiveness?
  6. How could a careful use of a combination of monetary and fiscal policies reduce the redistributive effects of monetary policy?
  7. How might the use of ‘forward guidance’ by central banks reduce the need for such large rises in interest rates?
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Inflation, interest rates and mortgage repayments

This is the first of three blogs looking at inflation, at its effect on household budgets and at monetary policy to bring inflation back to the target rate. This first one takes an overview.

The housing and mortgage markets are vitally important to the financial well-being of many households. We have seen this vividly in recent times through the impact of rising inflation rates on interest rates and, in turn, on mortgage repayments. Some people on variable rate mortgages, or whose fixed rate deals are coming to the end of their term, have struggled to pay the new higher rates. In this blog we explore the reasons behind these events and the extent to which the financial well-being of UK households has been affected.

Chart 1 shows the path of inflation in the UK since 1997 when the Bank of England’s Monetary Policy Committee (MPC) was first charged with meeting an inflation rate target (click here for a PowerPoint). It captures the impact of the inflation shock that began to emerge in 2021 and saw the CPI inflation rate peak at 11.1 per cent in October 2022 – considerably above the Bank’s 2 per cent target.

Despite easing somewhat, the CPI inflation rate is showing signs of persistence – meaning that it is taking time for it to return to target. One way of understanding this persistence is to look at a measure of inflation known as core inflation. This inflation rate measure excludes energy, food, alcoholic beverages and tobacco prices, all of which are notoriously volatile. Core inflation thus captures underlying inflationary pressures.

To address the inflationary pressures, the Bank of England began raising Bank Rate in December 2021 from a low of just 0.1 per cent. By June 2023 the Bank Rate had risen to 5 per cent with the prospect of further hikes. As the Bank Rate rises, the cost of borrowing from the Bank of England by commercial banks rises too. Therefore increases in the Bank Rate ripple through to other interest rates. However, the passthrough effect can be uneven affecting spreads between Bank Rate and other interest rates.

The increase in the Bank Rate is reflected in the increases in mortgage rates shown in Chart 2 (click here for a PowerPoint). As we have seen, this affects most immediately those with variable rate mortgages, and then those with fixed-rate mortgages as they come up for renewal. Analysis from the Resolution Foundation (2023) estimates that 4.2 million households saw their mortgage rates change between December 2021 and June 2023 – the equivalent of 56 per cent of mortgaged households.

The persistence of inflation means that mortgage rates may not have yet peaked and are likely to stay higher for longer than originally thought. With fixes normally between two to five years, the problem of higher rates for those renewing will continue. The Resolution Foundation projects that by the end of 2026, almost all households with a mortgage would have moved to a higher rate since December 2021. At this point, the typical annual repayment cost for mortgaged households is forecast to be £2000 per annum higher, leading to an increase in annual repayments for the UK household sector of £15.8 billion.

Chart 3 provides a visual picture of the typical annual repayment costs facing first-time buyers as a percentage of earnings after tax and national insurance (click here for a PowerPoint). The Nationwide Building Society figures are based on an 80% loan on the typical first-time buyer house price. It shows that repayment costs have been rising sharply on the back of rising interest rates and are now higher than at any time since the global financial crisis of 2007–8.

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Questions

  1. What possible indicators could be used to assess the affordability of residential house prices?
  2. What is captured by the rate of core inflation? Discuss the arguments for using this as the target inflation rate measure.
  3. What factors might affect the proportion of people taking out fixed-rate mortgages rather than variable-rate mortgages?
  4. Discuss the ways by which house price changes could impact on household consumption.
  5. Investigate the proportion of mortgages that are fixed rate and the typical length of the fixed rate term in two European countries, the USA and Japan. How does each differ from the UK?
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Interest rates and the impending recession

On 3 November, the Bank of England announced the highest interest rate rise in 33 years. It warned that the UK is facing the longest recession since records began. With the downturn starting earlier than expected and predicted to last for longer, households, businesses and the government are braced for a challenging few years ahead.

Interest rates

The Monetary Policy Committee increased Bank Rate to 3% from the previous rate of 2.25%. This 75-basis point increase is the largest since 1989 and is the eighth rise since December. What is more, the Bank has warned that it will not stop there. These increases in interest rates are there to try to tackle inflation, which rose to 10.1% in September and is expected to be 11% for the final quarter of this year. Soaring prices are a growing concern for UK households, with the cost of living rising at the fastest rate for 40 years. It is feared that such increases in the Bank’s base rate will only worsen household circumstances.

There are various causes of the current cost-of-living crisis. These include the pandemic’s effect on production, the aftermath in terms of supply-chain problems and labour shortages, the war in Ukraine and its effect on energy and food prices, and poor harvests in many parts of the world, including many European countries. It has been reported that grocery prices in October were 4.7% higher than in October 2021. This is the highest rate of food price inflation on record and means shoppers could face paying an extra £682 per year on average.

There is real concern about the impact of the interest rates rise on the overall economy but, in particular, on peoples’ mortgages. Bank of England Governor, Andrew Bailey, warned of a ‘tough road ahead’ for UK households, but said that the MPC had to act forcefully now or things ‘will be worse later on’.

However, it could be argued that there was a silver lining in Thursday’s announcement. The future rises in interest rates are predicted to peak at a lower rate than previously thought. Amongst all the mini-budget chaos, there was concern that rates could surpass the 6% mark. Now the Bank of England has given the assurance that future rate rises will be limited and that Bank Rate should not increase beyond 5% by next autumn. The Bank was keen to reassure markets of this by making clear the thinking behind the decision in the published minutes of MPC meeting.

Recession

With the Bank warning of the longest recession since records began, what does this actually mean? Economies experience periods of growth and periods of slowdown or even decline in real GDP. However, a recession is defined as when a country’s economy shrinks for two three-month periods (quarters) in a row. The last time the UK experienced a recession was in 2020 during the height of the pandemic. During a recession, businesses typically make less profits, pay falls, some people may lose their jobs and unemployment rises. This means that the government receives less money in taxation to use on public services such as health and education. Graduates and school leavers could find it harder to get their first job, while others may find it harder to be promoted or to get big enough pay rises to keep pace with price increases. However, the pain of a recession is typically not felt equally across society, and inequality can increase.

The Bank had previously expected the UK to fall into recession at the end of this year but the latest data from the Office for National Statistics (ONS) show that GDP fell by 0.3% in the three months to August. The Bank is predicting that GDP will shrink by 0.5% between May and August 2023, followed by a further fall of 0.3% between September and December. The Bank then expects the UK economy to remain in recession throughout 2023 and the first half of 2024.

With the higher interest rates, borrowing costs are now at their highest since 2008, when the UK banking system faced collapse in the wake of the global financial crisis. The Bank believes that by raising interest rates it will make it more expensive to borrow and encourage people not to spend money, easing the pressure on prices in the process. It does, however, mean that savers will start to benefit from higher rates (but still negative real rates), but it will have a knock-on effect on those with mortgages, credit card debt and bank loans.

The recession in 2020 only lasted for six months, although the 20.4% reduction in the UK economy between April and June that year was the largest on record. The one before that started in 2008 with the global financial crisis and went on for five quarters. Whilst it will not be the UK’s deepest downturn, the Bank stressed that it will be the longest since records began in the 1920s.

Mortgages

Those with mortgages are rightly feeling nervous about the impact that further increases in mortgage interest rates will have on their budgets. Variable mortgage rates and new fixed rates have been rising for several months because of this year’s run of rate rises but they shot up after the mini-Budget. The Bank forecasts that if interest rates continue to rise, those whose fixed rate deals are coming to an end could see their annual payments soar by an average of £3000.

Homebuyers with tracker or variable rate mortgages will feel the pain of the rate rise immediately, while the estimated 300 000 people who must re-mortgage this month will find that two-year and five-year fixed rates remain at levels not seen since the 2008 financial crisis. However, the Bank said that the cost of fixed-rate mortgages had already come down from the levels seen at the height of the panic in the wake of Kwasi Kwarteng’s mini-Budget, which sent them soaring above 6%.

There is a fear of the devastating impact on those who simply cannot afford further increases in payments. The Joseph Rowntree Foundation (JRF) said an extra 120 000 households in the UK, the equivalent of 400 000 people, will be plunged into poverty when their current mortgage deal ends. The analysis assumes that mortgage rates remain high, with homeowners forced to move to an interest rate of around 5.5%. For people currently on fixed rates typically of around of 2% which are due to expire, this change would mean a huge increase. Such people, on average, would find the proportion of their monthly income going on housing costs rising from 38% to 54%. In cash terms this equates to an average increase of £250, from £610 a month to £860 a month.

In addition to these higher monthly home-loan costs threatening to pull another 400 000 people into poverty, such turmoil in the mortgage market would increase competition for rental properties and could result in rents for new lets rising sharply as the extra demand allows buy-to-let landlords to pass on their higher loan costs (or more).

Unemployment

Since the mini-Budget, the level of the pound and government borrowing costs have somewhat recovered. However, mortgage markets and business loans are still showing signs of stress, adding to the prolonged hit to the economy. The Bank now forecasts that the unemployment rate will rise, while household incomes will come down too. The unemployment rate is currently at its lowest for 50 years, but it is expected to rise to nearly 6.5%.

Looking to the future

It is the case that the lasting effects of the pandemic, the war in Ukraine and the energy shock have all played their part in the current economic climate. However, it could be argued that the Bank and the government are now making decisions that will inflict further pain and sacrifice for millions of households, who are already facing multi-thousand-pound increases in mortgage, energy and food bills.

There have been further concerns raised about the possible tax rises planned by the Chancellor Jeremy Hunt. If large tax rises and spending cuts are set out in the Autumn Statement of 17 November, the Bank of England’s chief economist has warned that Britain risks a deeper than expected economic slowdown. This could weigh on the British economy by more than the central bank currently anticipates, in a development that would force it to rethink its approach to setting interest rates.

There is no doubt that the future economic picture looks painful, with the UK performing worse than the USA and the eurozone. The Bank Governor, Andrew Bailey, believes that the mini-Budget had damaged the UK’s reputation internationally, stating, ‘it was very apparent to me that the UK’s position and the UK’s standing had been damaged’. However, both the Governor and the Chancellor or the Exchequer agree that action needs to be taken now in order for the economy to stabilise long term.

Jeremey Hunt, the Chancellor, explained that the most important thing the British government can do right now is to restore stability, sort out the public finances and get debt falling so that interest rate rises are kept as low as possible. This echoes the Bank’s belief in the importance of acting forcefully now in order to prevent things being much worse later on. With the recession predicted to last into 2024, the same year as a possible general election, the Conservatives face campaigning to remain in government at the tail end of a prolonged slump.

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Questions

  1. Define the term ‘recession’ and how is it measured.
  2. Explain what happens to the key macroeconomic indicators during this period of the business cycle.
  3. Which policies would governments normally implement to get a economy into the
  4. expansionary/recovery phase of the business cycle and how do they work?
  5. What is the issue of raising interest rates during a downturn or recession?
  6. With unemployment expected to rise, explain what type of unemployment this is. What policies could be introduced to reduce this type of unemployment?