Jimmy borrowed $30,000 to add a room to his house.He financed the loan over 3 years at 6 percent per year.He expects a 2 percent inflation rate each year for the next 3 years.It follows that he expects to pay an annual real interest rate of

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Here, the nominal rate is 6% and the inflation rate is 2%, so the real interest rate is 6% - 2% = 4%.

Jimmy Borrowed $30,000 to Add a Room to His House