Question

Read the passage. Then answer the question that follows.
Jimena recently took out a fixed-rate loan from a bank in order to purchase a new car. She agreed to repay the loan within five years. Unexpectedly, the inflation rate rose dramatically shortly after she took out the loan.
Will this situation provide more financial benefit to Jimena or the bank? Why?

A Jimena, because the value of the money she was loaned will increase
B the bank, because the value of the money it loaned to Jimena will increase
C Jimena, because she will repay the loan with money worth less than the money she was loaned
D the bank, because it will be repaid with money worth more than the money it loaned to Jimena

Answer 1

Answer:

C Jimena, because she will repay the loan with money worth less than the money she was loaned

Explanation:

In simple terms, inflation shows how money value decreases over time. If the inflation rate rose dramatically, that means the value of money will decrease at a higher rate.

In this case, the present value of money will be much higher than the future value. Jimena gets loaned as the present value, but she will pay it at the future value which worth less than the present.