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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

The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

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

Within 1 or 2 percentage points, what has the U.S. inflation rate been during the last 20 years? Draw a graph to show the data.

Identify several parties likely to be helped and hurt by inflation.

Imagine that the government statisticians who calculate the inflation rate have been updating the basic basket of goods once every 10 years, but now they decide to update it every five years. How will this change affect the amount of substitution bias and quality/new goods bias?
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