The Reserve Bank of Australia made four consecutive cash rate increases in May-August 2022 in response to rising inflation. These RBA decisions increased interest rates as well as home loan repayments for Australian homeowners with the mortgage.

1. Assuming a perfectly competitive market and using a market demand and supply model:

(a) Illustrate the market equilibrium for Sydney apartments before the interest rate increases.

(b) Explain, with the aid of a new diagram, the impact of the interest rate increases on the market for Sydney apartments from part (a), assuming the construction industry was not affected.

(c) Suppose the NSW government was considering doubling the first-home buyer's grant. Explain the impact of this on the market for Sydney apartments and illustrate this on your diagram from part (b).