A borrower who makes a $1,000 loan for one year and earns interest in the amount of $75, earns what nominal interest rate and what real interest rate if inflation is two percent?
A) A nominal rate of 5.5% and a real rate of 2.0%.
B) A nominal rate of 7.5% and a real rate of 5.0%.
C) A nominal rate of 7.5% and a real rate of 9.5%.
D) A nominal rate of 7.5% and a real rate of 5.5%.

Question

Quizplus · Accepted Answer

Nominal interest rate = (Interest earned/Principal borrowed) x 100 = (75/1000) x 100 = 7.5%
Real interest rate = Nominal interest rate - Inflation rate = 7.5% - 2% = 5.5%

A Borrower Who Makes a $1,000 Loan for One Year