Answer to Question #290669 in Macroeconomics for Rodger

Question

Paul lends R10000 to his friend steven for one. They agree that steven would pay the R10000 back with 5% interest at the end of the year. If the inflation rate is 6% at the end of the year, which of the following would be true for the real value of the amount that steven pays back?

Answer 1

If the inflation rate is 6% at the end of the year, then the real value of the amount that steven pays back is $10000×(1 + 0.05 - 0.06) = 9900.$