18). Les buys a house in 1998. He obtains a fixed 10 % mortgage interest rate, and makes payments of $1,000 per month. The 1998 CPI is 90, the 1999 CPI is 90, the 2000 CPI is 100, the 2001 CPI is 110, and the 2002 CPI is 120. What is the real mortgage interest rate Les pays in 1999, 2000, and 2001, and 2002? a. 10 % every year b. 10 % , -1 % , 0 % and 1 % c. Depends on the value of the house! d. 0% , 10 % , 1 % and 0 % 19). For the problem above, what are the values in 1998 dollars of Les's monthly mortgage payments in 1999, 2000, 2001, and 2002? a. $1,000 every month of every year b. Depends on inflation rate c. Depends on the value of the house! d. monthly payments of $1,000, $900, $818, $750 for each of those years respectively e. monthly payments of $900, $1000, $625 and $902 respectively. 20). Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen, and Henry all expect that inflation will be 5 % over the term of the loan, and they agree on a nominal interest rate of 10 %. In actuality, the inflation rate is 8 % over the term of the loan. What was the expected real interest rate? a. 5% b. 8% c. 2% d. 10 % 21). In the problem above, what was the actual real interest rate? a. 5 % b. 8% c. 2% d. 10 % 22). In problem above, who benefit and who lost? a. Nobody, all parties entered into the deal by mutual agreement. b. The government is usually the winner when there is inflation because in real terms, it is cheaper to repay bonds. c. the banker lost because he receives less real interest income than he expected. Henry and Ellen gain because they pay less real interest income than they expected d. Henry and Ellen benefit, because if they had waited to buy, prices would have been 8 % higher. The realtor lost because he could have sold the house at an 8 % higher price. 23). People in northern states spend more on house heating than do people in southern states. If prices of heating oil and natural gas increase, and Social Security payments are indexed by the CPI, what happens to the relative economic well-being of Social Security recipients in northern and southern states? 18). Les buys a house in 1998. He obtains a fixed 10 % mortgage interest rate, and makes payments of $1,000 per month. The 1998 CPI is 90, the 1999 CPI is 90, the 2000 CPI is 100, the 2001 CPI is 110, and the 2002 CPI is 120. What is the real mortgage interest rate Les pays in 1999, 2000, and 2001, and 2002? a. 10 % every year b. 10 % , -1 % , 0 % and 1 % c. Depends on the value of the house! d. 0% , 10 % , 1 % and 0 % 19). For the problem above, what are the values in 1998 dollars of Les's monthly mortgage payments in 1999, 2000, 2001, and 2002? a. $1,000 every month of every year b. Depends on inflation rate c. Depends on the value of the house! d. monthly payments of $1,000, $900, $818, $750 for each of those years respectively e. monthly payments of $900, $1000, $625 and $902 respectively. 20). Henry and Ellen meet George, the banker, to work out the details of a loan. George, Ellen, and Henry all expect that inflation will be 5 % over the term of the loan, and they agree on a nominal interest rate of 10 %. In actuality, the inflation rate is 8 % over the term of the loan. What was the expected real interest rate? a. 5% b. 8% c. 2% d. 10 % 21). In the problem above, what was the actual real interest rate? a. 5 % b. 8% c. 2% d. 10 % 22). In problem above, who benefit and who lost? a. Nobody, all parties entered into the deal by mutual agreement. b. The government is usually the winner when there is inflation because in real terms, it is cheaper to repay bonds. c. the banker lost because he receives less real interest income than he expected. Henry and Ellen gain because they pay less real interest income than they expected d. Henry and Ellen benefit, because if they had waited to buy, prices would have been 8 % higher. The realtor lost because he could have sold the house at an 8 % higher price. 23). People in northern states spend more on house heating than do people in southern states. If prices of heating oil and natural gas increase, and Social Security payments are indexed by the CPI, what happens to the relative economic well-being of Social Security recipients in northern and southern states
