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Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house ...

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Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house ...

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings.

Refer to the scenario above. Just before John purchases the house, the sales tax on big ticket items goes up by 5 percent. How might this affect John?

▸ John might be less interested in buying the house.

▸ John might have to pay higher interest.

▸ John might have to take longer to pay off his house.

▸ All of the above could be true.

Textbook

Macroeconomics

Edition: 3^rd

Authors: Acemoglu, Laibson, List

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