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.
E) make you an inflation loser because of bracket creep.

Question

Quizplus · Accepted Answer

Since the inflation rate was higher than the interest rate, the real value of the money you repaid was less than the amount you borrowed, making you an inflation winner.

Suppose That Last Year You Borrowed $100 at 5 Percent