In the country of Hyrkania, the CPI in 2005 was 140 and the CPI in 2006 was 154. Jake, a resident of Hyrkania, borrowed money in 2005 and repaid the loan in 2006. If the nominal interest rate on the loan was 14 percent, what was the real interest rate?

Question

Quizplus · Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. The inflation rate is ((154-140)/140)*100 = 10%. Therefore, the real interest rate is 14% - 10% = 4%.

In the Country of Hyrkania, the CPI in 2005 Was