Suppose that you lend me $100 for a year,and that I agree to pay you $110 at that time (principal plus interest).Over the intervening year,however,the average price of goods in the economy falls by 4%.The real rate of return that you will earn on your loan to me is therefore equal to

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The nominal return is 10% ($110/$100 - 1). With a 4% deflation, the real return is 10% + 4% = 14%.

Suppose That You Lend Me $100 for a Year,and That