Suppose you borrow $2000 for one year and at the end of the year you repay the $2000 plus $110 of interest.If the expected inflation rate was 2.2% at the time you took out the loan,what was the real interest rate you paid?
A) 2.2%
B) 3.3%
C) 5.5%
D) 7.7%

Question

Quizplus · Accepted Answer

To calculate the real interest rate, we need to subtract the inflation rate from the nominal interest rate. In this case, the nominal interest rate is $110/$2000 = 5.5%. The real interest rate is therefore 5.5% - 2.2% (inflation rate) = 3.3%. So the answer is B) 3.3%.

Suppose You Borrow $2000 for One Year and at the End