Question

Suppose that the only good you purchase is premium bottled water and that at the beginning of the​ year, the price of a bottle is ​$2.00. Suppose you lend ​$1 comma 000 for one year at an interest rate of 13.9 percent. At the end of the​ year, the price of premium bottled water has risen to ​$2.04.

Calculate the real interest rate LOADING... on the loan.

nothing​%. ​(Enter your response as a percentage rounded to one decimal​ place.)

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Answer 1

Real interest rate is the interest rate which is adjusted for the change in inflation. Calculate the inflation rate as follows: New price - Initial Price Inflation rate= -x100 Initial Price _ 2.04 – 2x100 = 2% Calculate the real interest rate as follows: Real Interest Rate = Nominal Interest Rate - Inflation = 13.9-2 = 11.2% Therefore, the real interest rate is 11.2%