Question

Suppose you borrow $2000 for one year and pay a nominal interest rate of 5%. If the price index at the start of the year was 112 and the price index at the end of the year was 116, what was the real interest rate you paid? 1.4% | 3.6% | 8.6%

Answer 1

The real interest rate can be calculated by subtracting the rate of inflation from the nominal interest rate. In this case, the real interest rate you paid is 1.4%.

Step-by-step explanation:

The real interest rate can be calculated by subtracting the rate of inflation from the nominal interest rate. In this case, the nominal interest rate is 5% and the rate of inflation can be calculated by taking the difference between the price index at the end of the year and the price index at the start of the year, which is (116 - 112) / 112 = 0.0357.

So, the real interest rate is 5% - 3.57% = 1.43%.

Therefore, the real interest rate you paid is 1.4%.