Assume you borrow funds to buy a new car at 10 percent interest and you think that the economy-wide rate of inflation over the life of the loan will be 8 percent. If you are correct in your assumption, your real rate of interest on the car loan will be

Question

Quizplus · Accepted Answer

The real rate of interest can be calculated by subtracting the inflation rate from the nominal interest rate. 
In this case, nominal interest rate = 10 percent and the expected inflation rate = 8 percent. 
The real rate of interest = 10 percent - 8 percent = 2 percent. Therefore, the correct answer is A) 2 percent.

Assume You Borrow Funds to Buy a New Car at 10