Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest.If the inflation rate was 4%, what was the real interest rate you paid?
A)16 percent
B)12 percent
C)8 percent
D)6 percent
E)3 percent

Question

Quizplus · Accepted Answer

The nominal interest rate is 12% ($600/$5000). The real interest rate is the nominal rate minus the inflation rate: 12% - 4% = 8%.

Imagine That You Borrow $5,000 for One Year and at the End