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 real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 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 7.5 percent, which is given in the problem. To calculate the real interest rate, we need to adjust the nominal interest rate for inflation using the formula (1 + nominal interest rate) / (1 + inflation rate) - 1. Plugging in the values, we get (1 + 0.075) / (1 + 0.06) - 1, which simplifies to approximately 0.015 or 1.5 percent. Therefore, the correct answer is C.

Suppose That You Took Out a $1000 Loan in January