Ms.Lane borrowed $1,000 from her bank for one year at an interest rate of 10 percent.During that year,the price level went up by 15 percent.Which of the following statements is correct?
A)Ms.Lane will repay the bank fewer dollars than she initially borrowed.
B)Ms.Lane's repayment will give the bank less purchasing power than it originally loaned her.
C)Ms.Lane's repayment will give the bank greater purchasing power than it originally loaned her.
D)Ms.Lane's repayment will give the bank the same purchasing power that it originally loaned her.

Question

Quizplus · Accepted Answer

Ms.Lane will have to repay the bank $1,100 at the end of the year (original amount borrowed + 10% interest). However, due to the 15% increase in price level, the purchasing power of the $1,100 will be less than what the bank initially loaned her. Therefore, the bank will have less purchasing power than it originally loaned out.

MsLane Borrowed $1,000 from Her Bank for One Year at an Interest