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. What happens when the loan is repaid?

A) Ms. Smith will repay the bank fewer dollars than she initially borrowed.
B) Ms. Smith's repayment will give the bank less purchasing power than it originally loaned her.
C) Ms. Smith's repayment will give the bank greater purchasing power than it originally loaned her.
D) Ms. Smith's repayment will give the bank the same purchasing power that it originally loaned her.