Dick N.buys a house in 1973 and finances it with a mortgage that carries an annual interest rate of seven per cent.Inflation in 1973 is three per cent, inflation in 1974 is four per cent, and inflation in 1975 is five per cent.What is the real interest rate Dick pays on his mortgage in 1974?

Question

Quizplus · Accepted Answer

The real interest rate can be calculated by subtracting the inflation rate from the nominal interest rate. In 1974, the nominal interest rate is 7% and the inflation rate is 4%, so the real interest rate is 7% - 4% = 3%.

Dick Nbuys a House in 1973 and Finances It with a a Mortgage