1) Housing prices have been going up in the Austin, TX because several major companies are adding offices there. Karam and Mike are buying a house in Austin. They have a joint account with $325,000 in savings, and the place they are interested in costs $670,000. They go to DrissKill Bank where they have all their savings, and it is the same bank at which all of their other friends have accounts. At DrissKill Bank, Karam learns that she can borrow at a nominal interest rate of 7.5% percent. The prediction is that inflation will be 6 percent for 3 years after she buys the house and then will decrease to 5 percent in four years. Assume that DrissKill Bank is the only bank in their neighborhood and their friends deposit all of their savings to the bank as well. a) If they don't take a loan, are Karam and Mike debtors or lenders in relation to DrissKill Bank? If they take a loan from the Bank to cover the difference between the cost of the new house an their savings, are they debtors or lenders? b) Assume Karam and Mike take the loan at 7.5 percent on January 1 and make annual beginning-of- year payments of $125,000, how much will they owe at the beginning of year 3? (This question deals with a process known as amortization. At the end of the year, the total amount owed for that year is the amount owed from this year + interest on amount owed from this year. Households make their payments on Jan 1 the following year.) c) Suppose the inflation rate is 6 percent for 3 years and then unexpectedly changes to 7 percent in the fourth year. Does this trend benefit Karam and Mike? Why or why not? d) Just before Karam and Mike purchase the apartment, the city of Austin starts to subsidize the purchase of apartment buildings, and so the price of real estate decreases by 5 percent. How might this affect their inclination in buying the house? How will it affect their payments? Assume that the inflation is zero in this scenario. No rigorous mathematical proof is required. Just explain your reasoning in complete sentences. 1) Housing prices have been going up in the Austin, TX because several major companies are adding offices there. Karam and Mike are buying a house in Austin. They have a joint account with $325,000 in savings, and the place they are interested in costs $670,000. They go to DrissKill Bank where they have all their savings, and it is the same bank at which all of their other friends have accounts. At DrissKill Bank, Karam learns that she can borrow at a nominal interest rate of 7.5% percent. The prediction is that inflation will be 6 percent for 3 years after she buys the house and then will decrease to 5 percent in four years. Assume that DrissKill Bank is the only bank in their neighborhood and their friends deposit all of their savings to the bank as well. a) If they don't take a loan, are Karam and Mike debtors or lenders in relation to DrissKill Bank? If they take a loan from the Bank to cover the difference between the cost of the new house an their savings, are they debtors or lenders? b) Assume Karam and Mike take the loan at 7.5 percent on January 1 and make annual beginning-of- year payments of $125,000, how much will they owe at the beginning of year 3? (This question deals with a process known as amortization. At the end of the year, the total amount owed for that year is the amount owed from this year + interest on amount owed from this year. Households make their payments on Jan 1 the following year.) c) Suppose the inflation rate is 6 percent for 3 years and then unexpectedly changes to 7 percent in the fourth year. Does this trend benefit Karam and Mike? Why or why not? d) Just before Karam and Mike purchase the apartment, the city of Austin starts to subsidize the purchase of apartment buildings, and so the price of real estate decreases by 5 percent. How might this affect their inclination in buying the house? How will it affect their payments? Assume that the inflation is zero in this scenario. No rigorous mathematical proof is required. Just explain your reasoning in complete sentences
