Name: Thái Nguyễn Anh Duy

Roll number: CS170159

Subject: ECO121 – Macroeconomic.

Question 1: How does increasing leading interest raters affect business, household,
financial markets, and real estate markets?

Acctually, rising interest rates have a huge affect to businesses through many ways. First of
all, it can affect their revenue and their profit, as slower economic activity is likely to give
rise to lower demand for their goods or services; and of course, we can easy understand that
people will be reluctant to shop on credit, and while people with savings will see a ‘wealth
effect’ of higher returns for them, these interest rates have not yet caught up with rising
prices. Next, businesses will face with a big threat is higher borrowing costs, further eroding
margins. Last but not least, even if businesses are not impacted directly, they may still
experience second-hand effects due to the increased prices of goods from suppliers, and will
be forced to increase their own prices, and/or face supply disruptions. This could push many
consequences such as inflation even higher, further eroding sales. But have a fun fact that, not
all businesses are affected the same by changes in the interest rate. Higher interest rates will
cause people to spend more on budget products while cutting down on opulence and durable
products such as cars,houses,etc…. When interest rates are high, businesses will also refrain
from borrowing money for investment and growth. Thus, companies supplying machinery or
buildings for businesses will experience a fall in sales. So, the business have to control and
follow the interest rate in the most effective way and the most suitable way.

An increase in interest rates may lead households to increase savings since they can receive
higher rates of return. This is outlined in the marginal propensity to save. First and foremost,
loans become more expensive: The most obvious effect of increasing interest rates is that
loans become more expensive. In other words, as we have seen with the mortgage instances
above, we will have to pay more for the same amount of money. Secondly, as far as I am
concerned, the purpose of hiking interest rates is to control inflation. Consider the first point:
an increase in loan costs means that banks make credit more difficult to obtain, which
discourages consumption and raises inflation.Besides, the affect to the households is decline
in job creation: While interest rate increases strive to stabilize the economy, they frequently
result in a slowing of growth. If the economy does not develop and credit becomes more
difficult to obtain, job creation and unemployment may suffer.Finally, as we know all of the
preceding considerations tend to lead to consumers saving more money; during the pandemic,
household savings skyrocketed as many people preferred to keep their money in the face of
uncertainty. If you desire to stimulate savings in this uncertain economy environment.

Rising interest rate also affect to the financial market: when interest rates rise, it makes it
more difficult for financial market to raise capital. For example, they will have to pay higher
interest rates on the bonds they issue. Making it more expensive to obtain capital may have a
negative impact on future growth possibilities as well as near-term earnings. As a result,
profit estimates may be revised downward in the future as interest rates rise. If a corporation
is perceived to be slowing its growth or becoming less profitable—either through increased
debt expenses or lower revenue—the expected quantity of future cash flows falls. All else
being equal, this will result in a decrease in the price of the company's stock. If enough
companies' stock prices fall, the entire market, or the key indices that many people associate
with the market—the Dow Jones Industrial Average, S&P 500, and so on—will fall.
Investors will not see as much increase from stock price appreciation if they have lower
expectations for a company's growth and future cash flows. This may make stock ownership
less appealing. Furthermore, when compared to other assets, investing in shares can be
perceived as unduly risky.

Last affect is real estate market, according to experts, if interest rates increase, real estate
businesses will bear the most difficulties and risks. Since the real estate business operates
mainly on bank loans, home buyers also have to borrow money, so this industry will suffer a
double impact. According to experts, if interest rates are low, people tend to withdraw money
and pour money into the real estate sector in search of better profits. But if interest rates are
high, on the contrary, people will deposit money in banks, limited cash flow into real estate.
On the other hand, when lending interest rates increase, investors using financial leverage are
unable to repay their loans and will be forced to sell at a loss. and of course rising interest
rates will definitely affect investors' psychology, they will have to recalculate the investment
problem to be really effective. However, at the moment, the issue that businesses and
investors are most concerned about is how to access loans when credit "room" is still limited.
Hungry for capital, many businesses that could not get a bank loan had to borrow hot from
outside to maintain their operations. If this situation persists, many businesses will have to
stop playing.

Question 2: What should firms and household do in the case of increasing interest rates?

Business: The confusing mix of factors at play in the markets today makes it tough to say
which sector, asset class or company is certain to do well in a rising rate environment, Ma
noted. It’s not just rising rates and inflation, there are geopolitical concerns going on… And
we have a slowdown that may lead to a recession or maybe it won’t… It’s an uncommon,
even rare, mix of multiple factors. So, for example, financial service companies typically do
well in a rising rate environment because, among other things, they can make more money on
loans. But if there’s a slowdown, a bank’s overall loan volume could go down. That’s why
many expert suggests making sure your overall portfolio is broadly diversified across
equities, with some exposure to commodities, real estate and maybe even a small amount in
precious metals. The objective is to spread your bets because some of those locations will
win, but not all of them. However, before investing in a given stock, assess the company's
pricing power and how steady demand for their product is likely to be. For example,
increased interest rates often do not benefit technology enterprises. However, because cloud
and software service providers charge clients on a subscription basis, such fees may climb in
line with inflation, according to certified financial planner Doug Flynn, co-founder of Flynn
Zito Capital Management. Next is “Bonds: Go short” to the extent you already own bonds,
the prices on your bonds will fall in a rising rate environment. But if you’re in the market to
buy bonds you can benefit from that trend, especially if you purchase short-term bonds,
meaning one to three years. That’s because their prices have fallen more relative to long-term
bonds, and their yields have risen more. Ordinarily short- and long-term bonds move in
tandem.

Household: Best advice: If you’re carrying balances on your credit cards – which typically
have high variable interest rates – consider transferring them to a zero-rate balance transfer
card that locks in a zero rate for between 12 and 21 months. Just be sure to find out what, if
any, fees you will have to pay (e.g., a balance transfer fee or annual fee), and what the
penalties will be if you make a late payment or miss a payment during the zero-rate period.
The best strategy is always to pay off as much of your existing balance as possible – and to
do so on time every month – before the zero-rate period ends. Otherwise, any remaining
balance will be subject to a new interest rate that could be higher than you had before if rates
continue to rise. Moreover, if you don’t transfer to a zero-rate balance card, another option
might be to get a relatively low fixed-rate personal loan. Besides, if you’re close to buying a
home or refinancing one, lock in the lowest fixed rate available to you as soon as possible. If
you already have a variable-rate home equity line of credit and utilized some of it for a home
renovation project, McBride suggests asking your lender if you can fix the rate on your
outstanding debt, thus creating a fixed-rate home equity loan. Assume you have a $50,000
credit line but only utilized $20,000 for a renovation. You would request that a fixed rate be
applied to the $20,000 amount. If that isn't an option, McBride suggests paying off the loan
with a HELOC from another lender at a lower promotional rate.