You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%.Today,inflation instantly rises to 4% and stays that way for the duration of your loan.Based on the above information and all else being equal,today:

Question

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Inflation means that the purchasing power of a dollar decreases over time. Therefore, when you borrow money, you are essentially paying back the loan with dollars that represent less purchasing power than the dollars you borrowed. In this case, the inflation rate has increased from 2% to 4%, meaning that the dollars you are paying back have less purchasing power than when you borrowed them. This means that you are better off because you are paying back the loan with dollars that represent less purchasing power today than the dollars you borrowed before. Option C correctly reflects this.

You Borrow $10,000 Today at a Nominal Rate of 5%;