Question

Would it make sense to buy a house when mortgages rates are 14% and expected inflation is 15%? Explain your answer. (Even though the nominal rate for the mortgage appears high, the real cost of borrowing the funds is the difference between the two rates (14%-15%= -1%) So yes, under this circumstance it would be reasonable to make this purchase [explain why…explain how the inflation works and how the interest rates in mortgages really affects our decisions)

Answer 1

Answer: The nominal rate of mortgage (14%) is high, but when it is compared to expected inflation (15%), it is lower, which in turn makes the real or effective borrowing cost negative (-1%).