Question

You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year. The lender (correctly) assumes that inflation will be 2 percent this year. Based on the above information and assuming you adhere to the terms of the loan, you will pay back the lender exactly ________, which will represent ________ of purchasing power.

Answer 1

You will pay back the lender exactly $21,000, which will represent $20,600 of purchasing power.

Step-by-step explanation:

you will pay back the lender exactly $21,000, which will represent $20,600 of purchasing power.

$20,000 for this purchase at a 5 percent fixed rate

=$20,000*5/100

=$20,000*0.05 = $1,000

=$20,000 + $1,000 = $21,000

Inflation will be 2 percent this year

=$20,000*2/100

=$20,000*0.02 = $400

=$20,000 + ($1,000 - $400)

=$20,000 + $600 = $20,600