Suppose that last year you borrowed $100 at 5 percent interest to purchase a $100 pair of Nike cross-training shoes. This year you repaid the bank with interest. If the inflation rate was 10 percent last year, your purchase of the shoes would:
A) make you an inflation winner as you saved $5 on the shoes.
B) make you an inflation loser as you paid $5 more than you should have for the shoes.
C) not be affected at all by the inflation rate.
D) be taxed according to COLA adjustments.

Question

Quizplus · Accepted Answer

Inflation reduced the real value of the money you repaid, including interest, making the real cost of the shoes less than $100. Essentially, you paid back less in terms of purchasing power than you borrowed due to the inflation rate being higher than the interest rate.

Suppose That Last Year You Borrowed $100 at 5 Percent