Answer to Question #43677 in Macroeconomics for Garrett

Question

I lend you a $1,000 today and you agree to pay me $1,100 one year from today. You are going to buy a computer with the $1,000 that your borrow from me. You anticipate that if you wait a year to buy the computer, its price will rise to $1,070.

Answer 1

If I lend you a $1,000 today for buying computer, which will cost $1,070next year and you agree to pay me $1,100 one year from today, this is good offer, as you pay only $30 more than you will pay next year. Inflation rate during the year is 1070/1000*100% - 100% = 7% and interest rate is 1100/1000*100% - 100% = 10%. So, you pay only 3% more, but you get computer now.