You lend $5,000 to a friend for one year at a nominal interest rate of 10%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?
A)0%
B)4.4%
C)5.5%
D)5.8%
E)7.8%

Question

Quizplus · Accepted Answer

The real interest rate can be calculated using the formula: real interest rate = ((1 + nominal interest rate) / (1 + inflation rate)) - 1. Here, the nominal interest rate is 10% or 0.10, and the inflation rate can be calculated as (190 - 180) / 180 = 0.0556 or 5.56%. Plugging these values into the formula gives: ((1 + 0.10) / (1 + 0.0556)) - 1 = 0.044 or 4.4%.

You Lend $5,000 to a Friend for One Year at a Nominal