Jordan lent Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2 percent over the one-year period. What is the real interest rate that Taylor paid?

Question

Quizplus · Accepted Answer

To calculate the real interest rate, we need to adjust for inflation. The inflation rate was 2 percent, so we need to divide the nominal interest rate (the amount Taylor paid in interest) by 1 plus the inflation rate.

Nominal interest rate = $1,260 - $1,200 = $60 
Inflation rate = 2% = 0.02

Real interest rate = $60 / (1 + 0.02) = $58.82

To convert this into a percentage, we need to divide by the original loan amount and multiply by 100:

Real interest rate = ($60 / $1,200) * 100% = 5%

Therefore, Taylor paid a real interest rate of 5%.

Jordan Lent Taylor $1,200 on March 15, 2009