You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5% fixed rate for exactly one year.The lender (correctly)assumes that inflation will be 2% 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.

Question

Quizplus · Accepted Answer

The amount to be paid back to the lender after one year will be the original amount borrowed plus interest. Therefore, the amount to be paid back is:

$20,000 + ($20,000 x 0.05) = $21,000

However, inflation is also a factor to consider. If inflation is 2%, then the purchasing power of $21,000 after one year will be:

$21,000 / 1.02 = $20,588.24

This means that the $21,000 paid back to the lender will represent only $20,588.24 of current purchasing power, which is a decrease in value. Therefore, the best choice is D, which represents the exact amount to be paid back ($21,000) and the purchasing power after one year ($20,588.24).

You Are Thinking About Buying a New Car and Will