Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct?
A) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
B) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
C) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
D) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is calculated as the interest paid divided by the loan amount, which is $75/$1000 = 7.5%. The real interest rate is the nominal rate minus the inflation rate, which is 7.5% - 6% = 1.5%.

Suppose That You Took Out a $1000 Loan in January