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Danielle has loaned $500 to Richard at a 4% annual rate of interest for one year. If the inflation rate is constant at 7% for the entire term of the loan, how much purchasing power is lost after Richard repays the loan in full

User Ricco D
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4 votes

Answer:

$15

Step-by-step explanation:

In order to calculate the purchasing power lost the following formulae will be used:

Purchasing power lost = Loaned amount * (inflation rate - nominal rate)

Purchasing power lost = $500 * (0.07 - 0.04)

Purchasing power lost = $500 * 0.03

Purchasing power lost = $15

Hence, the purchasing power lost after Richard repays the loan in full is $15.

User Sheltond
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