You borrow money to buy a house in 2006 at a variable interest rate of 6.5%. Your interest rate is always 2% more than the rate of inflation. By 2009, the inflation rate has risen to 8.5%. Considering only your mortgage, is inflation good news or bad news for you?
A) good news, because it makes the real value of your mortgage payments decrease
B) bad news, because inflation hurts everyone
C) bad news, because it makes the nominal value of your mortgage payments increase
D) neither, because your interest rate is tied to the rate of inflation

Question

Quizplus · Accepted Answer

Since your interest rate is tied to inflation, as inflation rises, your interest rate also increases, keeping the real cost of your mortgage payments relatively stable.

You Borrow Money to Buy a House in 2006 at a Variable