8.0k views
4 votes
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-lessB-moreC-the sameD-none of the above

1 Answer

4 votes

Answer:

(A) less

Step-by-step explanation:

Given a positive inflation rate, the real value of the dollar will depreciate by the rate of inflation annually.

Thus, for a house that cost $100,000 today, given a 3% inflation rate, it would cost (100,000 * 1.03 = ) $103,000 after a year.

This means, $100,000 today will have the same value as $103,000 one year later.

Therefore, repayments, which will likely be a fixed sum every year, will have a lower purchasing power as the year progresses.

User Pablo De Luca
by
7.6k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.