Assume that Sarah agrees to lend $100 to Sam for one year.Sam agrees to pay Sarah $110 at the end of the year.If inflation over that one year is 7%,what real rate of interest does Sarah earn on her $100?
A)10%
B)7%
C)3%
D)13%
E)17%

Question

Quizplus · Accepted Answer

The real rate of interest can be calculated using the formula: real interest rate = nominal interest rate - inflation rate. Here, the nominal interest rate is 10% (since Sam agrees to pay back $110 on a $100 loan, which is a $10 increase on $100, or 10%), and the inflation rate is 7%. Therefore, the real interest rate = 10% - 7% = 3%.

Assume That Sarah Agrees to Lend $100 to Sam for One