Question

Assume you borrowed $100,000 at a fixed rate of 7 percent for 30 years to purchase a house. If the inflation rate is 3 percent, then your repayments to the lender have ___________ purchasing power than the dollars that s/he loaned to you.

A) less
B) more
C) the same
D) none of the above

Answer 1

The correct answer is option B.

Step-by-step explanation:

The rate of interest is given at 7%.

The rate of inflation is given at 3%.

This implies that the purchasing power is decreasing by 3% due to inflation. But it is also rising by 7% due to interest rate.

Since the increase in purchasing power is greater than decrease. After repayment the lender will have more purchasing power than he/she loaned out.