You lend $5,000 to a friend for one year at a nominal interest rate of 10%.The CPI over that year rises from 180 to 190.What is the real rate of interest you will earn?
A)0%
B)4.4%
C)5.5%
D)5.8%

Question

Quizplus · Accepted Answer

To find the real rate of interest, we need to adjust for inflation.

Real interest rate = (1 + nominal interest rate)/(1 + inflation rate) -1

In this case, nominal interest rate = 10% and inflation rate = (190-180)/180 = 5.56%

Real interest rate = (1 + 0.1)/(1 + 0.0556) -1 = 4.38%

Therefore, the real rate of interest you will earn is 4.4%, which is answer choice B.

You Lend $5,000 to a Friend for One Year at a Nominal