If you borrow money at a nominal interest rate of 5 percent and the inflation rate is 10 percent,what real interest rate will you pay?
A) -5 percent
B) 0.5 percent
C) 2 percent
D) 5 percent
E) 10 percent

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. In this case, 5 percent - 10 percent = -5 percent. This means that the borrower will actually lose purchasing power over time, making this a very unfavorable situation.

If You Borrow Money at a Nominal Interest Rate of 5