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

question 280

Multiple Choice

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 dollars 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 dollars 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.

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Definitions:

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