Under which one of the following situations would you be better off?
A) You have $10,000 in your savings account paying 5 percent per year and unanticipated inflation is 8 percent per year.
B) You have paid $500 for a $1,000 U.S. savings bond that matures in 10 years and unanticipated inflation is 10 percent per year.
C) You lend a friend $10,000 at 2 percent to be repaid in one year and unanticipated inflation is 4 percent during the year.
D) You borrowed $10,00 at 2 percent to pay for this year's college expenses and unanticipated inflation is 3 percent during the year.

Question

Quizplus · Accepted Answer

Inflation erodes the purchasing power of money over time. Therefore, it is better to borrow money when inflation is high and repay it when inflation is low. In this scenario, you are borrowing money at a low interest rate of 2 percent and inflation is only 3 percent. Therefore, the real value of the money you borrowed will decrease over time, meaning you will effectively be repaying less than you borrowed.

Under Which One of the Following Situations Would You Be