Darius lent Alejandro $1,000 for one year with the understanding that Alejandro would repay $1,070. If the actual inflation rate was 7 percent, what was the real rate of interest Darius received?
A) 14 percent
B) 7 percent
C) 4 percent
D) 0 percent
E) −7 percent

Question

Quizplus · Accepted Answer

The nominal interest rate was 7 percent (since $1,070 is $1,000 plus 7 percent interest). With an inflation rate of 7 percent, the real rate of interest is 0 percent because the nominal rate minus the inflation rate equals the real rate (7% - 7% = 0%).

Darius Lent Alejandro $1,000 for One Year with the Understanding