Question

You borrow $10,000 today at a nominal rate of 5%; inflation for the past 10 years has been exactly 2%. Today, inflation instantly rises to 4% and stays that way for the duration of your loan. Based on the above information and all else being equal, today:_______.a. the real rate of interest on your loan is 14%.
b. the real rate of interest on your loan was previously 10% and is now 35%.
c. the real rate of interest on your loan is now –2%.
d. you will pay the lender back exactly $9,500.
e. you will pay the lender back exactly $10,700.

Answer 1

Answer:

The real rate of interest on your loan is 1%.

Explanation:

Given that,

Amount of borrowings = $10,000

Nominal interest rate = 5 percent

Inflation for the past 10 years = 2%

Today, inflation rises to 4%.

Real interest rate is determined by subtracting the inflation rate from the nominal interest rate.

Real interest rate = Nominal interest rate - Inflation rate

                             = 5% - 4%

                             = 1%

The real rate of interest on your loan is 1%.