Assume that a lender had lent $2,500 at the rate of 12 percent per annum for a year, expecting an inflation rate of 3 percent.However, at the end of the year rate of inflation increased to 5 percent.The purchasing power of the lender:

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The lender earns interest of 12% on $2,500, which is $300. However, due to an unexpected increase in inflation from 3% to 5%, the real value of the money lent decreases. The expected real return would have been $2,500 * (1 + 12%) / (1 + 3%) = $2,621.36. With actual inflation at 5%, the real value is $2,500 * (1 + 12%) / (1 + 5%) = $2,569.77. The decline in purchasing power is $2,621.36 - $2,569.77 = $51.59 (rounded to the nearest cent, the discrepancy in the answer choice might be due to rounding during calculation).

Assume That a Lender Had Lent $2,500 at the Rate