The Bank of Canada takes several measures to protect CanadianEconomy. One of the tools Bank of Canada uses to adjust monetarypolicies is changing the interest rate. Increasing in interest ratewould reduce how much Canadian borrow and spend. This will affectthe housing market, as the increased interest rate means lowerability to borrow. A real estate advisor, however, thinks theOttawa real estate market is hot and that an increase in interestrate would not lower the prices of houses. He assesses thelikelihood of Bank of Canada’s action and its effect on houseprices in Ottawa:
The likelihood of an increase in the average price of houses inOttawa if the interest rate increases = 0.15
The likelihood of an increase in the average price of houses inOttawa if the interest rate maintains the same level = 0.75
The chance of Bank of Canada’s maintaining the current interestrate = 0.65
We are certain that the Bank of Canada does not lower theinterest rate in the near future. Bank of Canada believes tostrengthen the Economy, the current interest rate should bemaintained or increase. If you notice an increase in the price ofhouses, what probability do you assign to the event that Bank ofCanada increased the interest rate?
