Jimmy borrowed $50,000 to add a room to his house. He financed the loan over 3 years at 7 percent per year. He expects a 2 percent inflation rate each year for the next 3 years. It follows that he expects to pay an annual real interest rate of

Question

Quizplus · Accepted Answer

The real interest rate can be approximated by subtracting the inflation rate from the nominal interest rate. Therefore, 7% - 2% = 5%.

Jimmy Borrowed $50,000 to Add a Room to His House