Question

Ramon decided to purchase a new car that cost $38,000. He went to the bank, where he secured a fixed rate loan at 10% for a period of five years. The CPI is rising at a rate of 3% each year. The real rate of interest that Ramon will pay for his car loan in year 2 is

Answer 1

Answer: 7%

Step-by-step explanation:

From the question, we are informed that Ramon decided to buy a new car that cost $38,000 and he went to the bank, where he secured a fixed rate loan at 10% for a period of five years. The CPI is rising at a rate of 3% each year. The real rate of interest that Ramon will pay for his car loan in year 2 will be the interest rate he gets after allowing for inflation. Since we've been told that the CPI is rising at 3% every year, the real interest will be:

= 10% - 3%

= 7%