In 2010, Econ Bank issued numerous 30-year, fixed-rate mortgage loans at an interest rate of 4.5%. At that time, the price index was 160. Five years later, the borrowers were continuing to make payments on time, and the price index was 150. How are the bank and the borrowers impacted by the changing price level?
A) The bank gained, and the borrowers were harmed.
B) The bank was harmed, and the borrowers gained.
C) Both the bank and the borrowers gained from the lower price level.
D) Both the bank and the borrowers were harmed by the lower price level.

Question

Quizplus · Accepted Answer

The bank gained because the real value of the mortgage payments increased as the price level decreased. The borrowers were harmed because they had to pay back a larger amount of real value than they had originally borrowed.

In 2010, Econ Bank Issued Numerous 30-Year, Fixed-Rate Mortgage Loans