Suppose that you borrow $5,000 from the bank to purchase some land,and you agree to pay 9 percent interest on the loan.If the loan must be repaid in 12 months,and the inflation rate is 13 percent during the year,then
A)you will repay the bank with more purchasing power than you initially borrowed.
B)you will repay the bank with fewer dollars than the bank initially loaned you.
C)you will repay the bank with less purchasing power than it initially loaned you.
D)the bank will receive fewer dollars,because of inflation,than it had initially expected to receive.

Question

Quizplus · Accepted Answer

Inflation will decrease the purchasing power of the dollars you repay the bank with, meaning the bank will receive less purchasing power than it initially loaned you. This is why choice C is the correct answer. While the loan must be repaid in the same amount of dollars, the inflation rate means those dollars will be worth less in terms of purchasing power.

Suppose That You Borrow $5,000 from the Bank to Purchase