Page 197 - Krugmans Economics for AP Text Book_Neat

Section 3 Summary

19. The accompanying diagram shows mortgage interest rates 20. The accompanying table provides the inflation rate in the year
and inflation during 1990–2005 in the economy of Albernia. 2000 and the average inflation rate over the period 2000–2007
When would home mortgages have been especially attractive for eight different countries.
and why? a. Given the expected relationship between average inflation and
menu costs, rank the countries in descending order of menu
Inflation rate, costs using average inflation over the period 2000–2007.
interest rate
Inflation b.Rank the countries in order of inflation rates that most fa-
12% rate vored borrowers with seven-year loans that were taken out
10 in 2000. Assume that the expected inflation rate was the in-
flation rate in 2000.
8
c. Did borrowers who took out seven-year loans in Japan gain
6
or lose overall versus lenders? Explain.
4 Mortgage
interest rate
2 Inflation rate Average inflation
Country in 2000 rate, 2000–2007
1990 1993 1996 1999 2002 2005 Brazil 7.1% 7.3%
Year China 0.3 1.6
France 1.7 1.8
Indonesia 3.8 8.8
Japan −0.7 −0.3
Turkey 56.4 27.8
United States 3.4 2.8
Zimbabwe 55.7 904.1
Source: IMF.

Summary 155