Question : How does loopback work (ping 127.0.0.1)

Recently I had an interview for a job I really wanted.  

One of the questions I was asked is "You have a PC with no network connectivity,  all the PC's around it are working fine.  You use the ping 127.0.0.1 command and this is working (i.e. you get a reply),  what is the most likely cause of the issue ?"

Now i know that 127.0.0.1 is the loopback address,  but I am unsure of exactly how it works - so don't believe my answer was quite correct.  

My reply was "check the network cable is properly inserted"  - which in most cases I have found to be the problem.
but the interviewers response was "but loopback works"  - from his response I assume loopback must actually go out
to the hub or something and then come back ?

Normally to test network connectivity I would just ping a static IP address from the network i.e. a server that I know is on-line.

Can anyone explain how loopback works ?

Thanks guys

Answer : How does loopback work (ping 127.0.0.1)

No, loopback does not go out to the hub.  THe address 127.0.0.1 is internal to the device you are using.
PIng to this address will even work if the cable is unplugged, so your answer seems like a good one.
THe question is not a good one - I hope the interviewer knew what they were talking about.
There is a lot more informaiton needed here to address the problem: what does the "ipconfig /all" show (assuming this is a WIndows PC)?  IS there a link light on the ethernet interface?  IS duplex set to auto or could it be mismatched with the interface on the connecting device? Are the other PCs set on DHCP and this one on manual (or vice versa)? IS this PC in the same network space as the other PCs?

LOts of questions for that interviewer to answer before they can really ask that question.
CajunBIll