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

Question

Quizplus · Accepted Answer

To maintain the purchasing power of your loan over a year during which the price level rises by 10 percent, you must earn a nominal interest rate of at least 10 percent. This compensates for the inflation and keeps the real value of your money constant.

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