If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent,
A) you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.
B) you must have earned a nominal interest rate of 5 percent to maintain the purchasing power of your loan.
C) the purchasing power of your loan has risen over the year regardless of the interest rate at which you lent it.
D) the purchasing power of your loan has remained constant over the year regardless of the interest rate at which you lent it.

Question

Quizplus · Accepted Answer

To maintain the purchasing power of your loan when the price level rises by 10%, you need to earn a nominal interest rate of at least 10%. This compensates for the inflation and preserves the real value of the money lent.

If You Lend a Dollar for a Year and at the End