Question

What happens over time to the real cost of purchasing a home, if the mortgage payments are fixed in nominal terms and inflation is in existence? (A) The real cost is constant. (B) The real cost is increasing. (C) The real cost is decreasing. (D) The price index must be known to answer this question.

Answer 1

(C) The real cost is decreasing.

Step-by-step explanation:

1 + real rate = (1 + nominal rate)/(1+ inflation)

So, with existence of inflation, real rate cost will be decreasing after each period. After each period, it will be found out by dividing with inflation rate in the way shown above and added multiplicatively.