You borrow $10,000 from a bank for one year at a nominal interest rate of 5%.The CPI over that year rises from 180 to 200.What is the real interest rate you are paying?
A)15%
B)5%
C)-1.1%
D)-6.1%
E)-8.1%

Question

Quizplus · Accepted Answer

To calculate the real interest rate, we need to use the formula: 
Real interest rate = (1 + nominal interest rate) / (1 + inflation rate) - 1
In this case, the nominal interest rate is 5%, and the inflation rate can be calculated as:
Inflation rate = (200 - 180) / 180 = 0.1111 or 11.11%
Plugging in these values, we get:
Real interest rate = (1 + 0.05) / (1 + 0.1111) - 1
Real interest rate = -0.061 or -6.1%
Therefore, the correct answer is D.

You Borrow $10,000 from a Bank for One Year at a Nominal