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Chapter 9: Q.9 (page 242)

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. Meaning

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

An adjustable-rate mortgage which is also called a variable-rate mortgage and tracker 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. Explanation

Adjustable-rate mortgages as the name suggests 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

A fixed-rate mortgage has the same interest rate over the life of the loan, whether the mortgage is for 15 or 30 years. By contrast, an adjustable-rate mortgage changes with market interest rates over the life of the mortgage. If inflation falls unexpectedly by 3%, what would likely happen to a homeowner with an adjustable-rate mortgage?

How do economists use a basket of goods and

services to measure the price level?

If a government gains from unexpected inflation when it borrows, why would it choose to offer indexed bonds?

Table 9.4 shows the fruit prices that the typical college student purchased from 2001 to 2004. What is the amount spent each year on the “basket” of fruit with the quantities shown in column 2?

If, over time, wages and salaries on the average rise at least as fast as inflation, why do people worry about how inflation affects incomes?
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