Question

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

Answer 1

Answer:

$15

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.