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 7 percent, then your repayments to the lender have ___________ purchasing power as the dollars that s/he loaned to you.

Answer 1

Available Options are:

a). less

b). more

c). the same

d). none of the above

Answer:

Option C The same

Explanation:

The reason is that the return that the lender is demanding is equal to inflation which means all that the lender will earn will be waived off due to inflation or in other words the return earned is equal to the decrease in the value of the investment value. So the net effect of the investment is zero or we can say that the investment is at no profit & loss position. So the purchasing power of the repayment to lenders are the same to the amount taken as loan.

Answer 2

Answer:

The same

Explanation:

Based on the scenario been described in the question, borrowing $100,000 at a fixed d rate of 7 percent for 30 years, then the repayment will be "the same purchasing power" because the inflation rate is at 7 percent when returning funds that is loaned to the person who lend the money out