If you borrow money at a nominal interest rate of 5 per cent and the inflation rate is 10 per cent, what real interest rate will you pay?
A) -5 per cent
B) 0.5 per cent
C) 2 per cent
D) 10 per cent

Question

Quizplus · Accepted Answer

The real interest rate is the nominal interest rate minus the inflation rate. 
Real interest rate = Nominal interest rate - Inflation rate 
= 5% - 10% 
= -5%
Since the inflation rate is higher than the nominal interest rate, the real interest rate is negative (-5%). This means that the borrower is actually losing purchasing power over time, which is not a good situation.

If You Borrow Money at a Nominal Interest Rate of 5