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Question #10 homework help ?

SUGAR FVATIVES Chapter 22 inflation 10. 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? REVIEW QUESTIONS 11. How do economists use a basket of goods and services to measure the price level? 12. Why do economists use index numbers to measure the price level rather than dollar value of goods? 13. What is the difference between the price level and the rate of inflation? 14. Why does "substitution bias" arise if we calculate the inflation rate based on a fixed basket of goods? 15. Why does the "quality/new goods bias" arise if we calculate the inflation rate based on a fixed basket of goods? 16. What has been a typical range of inflation in the U.S. economy in the last decade or so? 17. Over the last century, during what periods was the U.S. inflation rate highest and lowest? 18. What is deflation? 19. Identify several parties likely to be helped and hurt by inflation. 20. What is indexing? 21. Name several forms of indexing in the private and public sector. CRITICAL THINKING QUESTIONS 27. Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI. 22. Inflation rates, like most statistics, are imperfect measures. Can you identify some ways that the inflation rate for fuit does not perfectly capture the rising price of fruit? 23. Given the federal budget deficit in recent years, come pconomist argued that by adjusting Social flation U h e CPI, Social Security payr recip at is their Security is it? argument deflar irate measure 28. Why do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries? tree or 24 29. If over time, wages and salaries on average rise at least as fast as inflation, why do people worry about how inflation affects incomes? 30. Who in an economy is the big winner from inflation? cts a of ir cians who the basic

Answer 1

An adjustable-rate mortgage is one where the interest rate is periodically adjusted to an index of inflation. So, if the inflation is declining then the interest rate on an adjustable-rate mortgage will also decline. This is not the case with the fixed-rate mortgage where the interest rate is fixed.

So, a decline in the inflation rate by 3% will benefit a homeowner with an adjustable-rate mortgage as the interest burden of the homeowner will decline.