Question

en Sans U A A Wrap Text General $ % E. Merge & Center Condition Formatt G H Interest Rates: Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 7 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be 4.25 percent. What is the total dollar amount you will have to pay her back in a year? What percentage of the interest payment is the result of the real rate of interest?

Answer 1

So the amount borrowed is $500,

The nominal interest rate is 7 %,

So, the total amount to be repaid is : $535

The interest pid is :

7% * 500 = $35

So, total amount repaid = $500 + $ 35

= $ 535

Nominal interest rate = real interest rate + inflation

So, the real interest rate percebtage is :

7 % - 4.25%

= 2.75%