Answer to Question #118837 in Macroeconomics for Karan Bhanot

Question

John secured the bank's $2,000 mortgage to buy a car. After the contract was written it turned out that inflation in the economy was lower than expected. Who gained from this development and who lost? Explain Within 100 words

Answer 1

John gained from the development because of the lower inflation which could have been caused by increase in aggregate demand. When the inflation rate is low people will buy more goods before the inflation rate rises. When John secure the mortgage from the bank he did not know that the inflation rate would fall.

When repaying the mortgage he will repay a lower amount than the expected. Therefore, this reduced the cost of mortgage and he ended up paying less amount than the expected amount. If John had delayed in paying the mortgage he would have paid the agreed sum.