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Chapter 22: Q. 9 (page 552)

How should an increase in inflation affect the interest rate on an adjustable-rate mortgage?

Short Answer

Expert verified

An increase in inflation affects the interest rate on an adjustable-rate mortgage by reducing the interest rate.

Step by step solution

01

Step 1. Definitions.

An increase in the price of goods and services over time that decreases the purchasing power of money is called an inflation rate.

An adjustable-rate mortgage is a mortgage when the interest rate of a loan is adjusted based on the index that shows the lender's cost of borrowing on the credit market.

02

Step 2. Increase in inflation effect.

Adjustable-rate mortgages can be adjusted, the more the inflation, the higher the interest rate on the adjustable-rate mortgage, so more inflation reduces the real interest rates on a fixed-rate mortgage.

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Most popular questions from this chapter

If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:

a. A union member with a COLA wage contract

b. Someone with a large stash of cash in a safe deposit box

c. A bank lending money at a fixed rate of interest

d. A person who is not due to receive a pay raise for another 11 months

Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of

goods?

Construct the price index for a “fruit basket” in each year using 2003as the base year.

If inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

Compute the inflation rate for fruit prices from 2001 to 2004.
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