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-lessB-moreC-the sameD-none of the above

Answer 1

Answer:

(A) less

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.