Answer:
Option (C) $250
Explanation:
Data provided in the question:
Amount willing to lend i.e Loan = $5,000
Nominal rate of interest = 7%
Rate of inflation = 2%
Now,
Purchasing power in one year = Loan × ( 1 + Real interest rate )
= Loan × [ 1 + ( Nominal rate of interest - Rate of inflation ) ]
= $5,000 × [ 1 + ( 7% - 2% )]
= $5,000 × [ 1 + 5% ]
= $5,000 × [ 1 + 0.05 ]
= $5,250
Hence,
Additional purchasing power in one year = $5,250 - $5,000
= $250
Option (C) $250
