Suppose that you lend me $100 for a year,and that I agree to pay you $110 at the end of one year (principal plus interest).Over the intervening year,however,the average price of goods in the economy rises by 3%.The real rate of return that you will earn on your loan to me is therefore equal to

Question

Quizplus · Accepted Answer

The real rate of return is the nominal rate of return minus the inflation rate. In this case, the nominal rate of return is 10% (the $10 in interest divided by the $100 loaned) and the inflation rate is 3%.

Real rate of return = nominal rate of return - inflation rate 
Real rate of return = 10% - 3% 
Real rate of return = 7%

Therefore, the best choice is D, 7%.

Suppose That You Lend Me $100 for a Year,and That