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)17%
C)7%
D)13%
E)3%

Question

Quizplus · Accepted Answer

The nominal interest rate is 10% (since Sam pays $110 on a $100 loan). The real interest rate is calculated by adjusting the nominal rate for inflation: Real Interest Rate = Nominal Rate - Inflation Rate = 10% - 7% = 3%.

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