Tony loaned $1,000 to Dave for one year, with the understanding that Dave would repay $1,070 to Tony.If the actual inflation rate was 7 percent, what was the real rate of interest Tony received?
A) 14 percent
B) 7 percent
C) 4 percent
D) 0 percent

Question

Tony loaned $1,000 to Dave for one year, with the understanding that Dave would repay $1,070 to Tony.If the actual inflation rate was 7 percent, what was the real rate of interest Tony received?  
A) 14 percent 
B) 7 percent 
C) 4 percent 
D) 0 percent

Quizplus · Accepted Answer

The nominal interest rate was 7% ($70 on $1,000), but with 7% inflation, the real rate of interest is 0% because the purchasing power of the money returned is the same as the amount loaned.

Tony Loaned $1,000 to Dave for One Year, with the Understanding