Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent.After Elwood repaid the loan in full,Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000.From this,we can conclude that the rate of inflation during the year was
A)-4 percent.
B)4 percent.
C)6 percent.
D)14 percent.

Question

Quizplus · Accepted Answer

Nominal interest rate = 10%
Real interest rate = Nominal interest rate - Inflation rate
Let inflation rate be x
Then real interest rate = 10% - x
Since the loan was repaid in full, Jake received $5,000*(1+10%)=$5,500
But Jake complained that he could buy 4% fewer goods with $5,500 than he could before the loan. This means that the real value of the repayment was $5,500*(1-4%)=$5,280
Setting up an equation: 
$5,280 = $5,000*(1+10%-x)
Solving for x, we get x = 14%
Therefore, the rate of inflation during the year was 14%.

Jake Loaned Elwood $5,000 for One Year at a Nominal