Deﬂation can leave households that have mortgages with negative equity. This means that:
A) deﬂation causes the value of the mortgage to fall.
B) deﬂation transfers wealth from the bank to the household with the mortgage.
C) deﬂation increases the real value of assets like housing.
D) deﬂation causes the value of the house to be lower than the outstanding balance of the

Question

Quizplus · Accepted Answer

Deflation typically leads to a decrease in prices, including the value of houses. If the value of a house falls below the outstanding balance of the mortgage, the household is said to have negative equity. This does not mean that the value of the mortgage itself falls (A is incorrect), nor does it transfer wealth from the bank to the household (B is incorrect), nor does it increase the real value of assets like housing (C is incorrect). Instead, it means that the value of the house is less than what is owed on it, which is accurately described in option D.

Deﬂation Can Leave Households That Have Mortgages with Negative Equity