Suppose That You Borrow $100,000 from the Bank to Purchase

question 128

Multiple Choice

Suppose that you borrow $100,000 from the bank to purchase some land and you agree to pay 2 percent interest on the loan. If the loan must be repaid in 12 months and the inflation rate is 3 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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