Macroeconomics Question Help (Finding Interest Rates)

Question

Suppose home owners owe $7 trillion in mortgage loans.

A) If the mortgage interest rate is 5 percent, approx how much are home owners paying in annual mortgage interest?

B) If the interest rate drops to 4 percent, bu how much will annual interest payments decline?

Answer 1

At r = 5%, we calculate the total interest as $7T x 0.05 = $0.35T

(Notice you must express the interest rate in decimal form!)

At r=4%, the total interest is $7 x 0.04 = $0.28T

So, when the interest rate falls by 1%, total interest paid falls by $0.07T (= $0.35 - $0.28).