Interest Rates Suppose that you make a loan of $1,500 to your friend at a rate of 10% interest because you expect the inflation rate to be 5%. a) By how much does your purchasing power increase once the loan is completely paid off? b) Assuming that after the loan was repaid, you discovered that inflation rate over the life of the loan was only 2%. Who gained?

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Interest Rates
Suppose that you make a loan of $1,500 to your friend at a rate of 10% interest because you expect the inflation rate to be 5%.
a) By how much does your purchasing power increase once the loan is completely paid off?
b) Assuming that after the loan was repaid, you discovered that inflation rate over the life of the loan was only 2%. Who gained?

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