You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?
A)15%
B)5%
C)-1.1%
D)-6.1%

Question

Quizplus · Accepted Answer

To calculate the real interest rate, we need to adjust for inflation.

The inflation rate can be calculated using the CPI formula:

Inflation rate = ((Ending CPI value - Beginning CPI value) / Beginning CPI value) x 100

In this case, the inflation rate is: ((200 - 180) / 180) x 100 = 11.11%

The real interest rate is calculated as follows:

Real interest rate = Nominal interest rate - Inflation rate

Real interest rate = 5% - 11.11% = -6.11%

Therefore, the real interest rate you are paying is -6.11%. Choice D is the correct answer.

You Borrow $10,000 from a Bank for One Year at a Nominal