Question

1.) Suppose a person named Monique borrows $5,000 in 2018 which she needs to pay back to the “Bank of Issa” in a year. The nominal interest rate is 40%, and the inflation rate is 50%. How much will she need to pay back to the bank in 2019?

Group of answer choices

$2,500

$5,000

$7,000

$8,500

Not enough information

2.) For Monique in the previous problem, what is the real interest rate of the loan?

Group of answer choices

-10%

0%

10%

100%

Not enough information

Answer 1

Solution:-

(1). Payment will be made in terms of nominal interest rate.

Nominal interest rate = 40%

Interest payment = 40% of 5000 = 2000

She will have to pay back 5000 + 2000 = $7000

Answer = $7000

(2). Real interest rate = nominal interest rate - inflation rate

                                   = 40% – 50%

                                   = -10%

Answer is Option (A) -10%