Suppose you borrow $1,000 of principal that must be repaid at the end of two years, along with interest of 5 percent a year. If the annual inflation rate turns out to be 10 percent, Hint: Future value = Present value × (1 + Growth in prices)t, where t is the number of years evaluated.

Real value of loan repayment = Amount of loan × (1 + Real interest rate)t

Instructions: Round your responses to the nearest whole number. If you are entering any negative numbers be sure to include a negative sign (−) in front of those numbers.

a. What is the real rate of interest on the loan?

%

b. What is the real value of the principal repayment?

$

c. Who loses, the debtor or the creditor?
multiple choice
Debtor
Creditor