Suppose you are borrowing money to buy a car, and all rates are fixed and known with certainty. You have two choices:OPTION 1: The interest rate on your car loan is 20% and the inflation rate is 19%OPTION 2: The interest rate on your car loan is 5% and the inflation rate is 2%?Based only on these numbers, which option would you take? *You should be able to explain your reasoning: see posted solutions.Group of answer choicesOPTION 1OPTION 2
Question
Suppose you are borrowing money to buy a car, and all rates are fixed and known with certainty. You have two choices:OPTION 1: The interest rate on your car loan is 20% and the inflation rate is 19%OPTION 2: The interest rate on your car loan is 5% and the inflation rate is 2%?Based only on these numbers, which option would you take? *You should be able to explain your reasoning: see posted solutions.Group of answer choicesOPTION 1OPTION 2
Solution
The best option to choose would be OPTION 2. Here's why:
When you borrow money, you have to pay back the amount you borrowed plus interest. The interest rate is the cost of borrowing money. In this case, OPTION 1 has a higher interest rate (20%) compared to OPTION 2 (5%). This means you'll pay more money back to the lender in OPTION 1 than in OPTION 2.
Inflation is the rate at which the general level of prices for goods
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