Ms Smith Borrowed $1000 from Her Bank for One Year

Multiple Choice

Ms. Smith borrowed $1000 from her bank for one year at an interest rate of 10 percent per year. During that year the price level went up by 15 percent. Who loses and who gains because of the unexpected inflation?

A) Ms. Smith loses 5 percent, but the bank gains 5 percent.
B) Ms. Smith gains 5 percent, but the bank loses 5 percent.
C) Ms. Smith loses 10 percent, but the bank gains 5 percent.
D) Ms. Smith gains 10 percent, but the bank loses 5 percent.