You are thinking about buying a new car and will borrow $20,000 for this purchase at a 5 percent fixed rate for exactly one year.The lender (correctly)assumes that inflation will be 2 percent 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 total amount to be paid back will be ($20,000 x 5% = $1,000) + ($20,000) = $21,000. However, because inflation is expected to be 2 percent, the purchasing power of $21,000 will be reduced by 2 percent, which is ($21,000 x 2% = $420). Therefore, the amount of purchasing power that will be lost is $21,000 - $20,580, which is $420. Therefore, the amount paid back will represent $20,580 in purchasing power, which is approximately $20,600.

You Are Thinking About Buying a New Car and Will