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19 October, 07:06

Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid

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  1. 19 October, 07:16
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    8%

    Explanation:

    Amount borrowed. $5000

    Time = one year

    Interest paid = $600

    Inflation rate = 4%

    The inflation rate is equivalents to

    4/100 x 5000 x 1 year

    = 0.04 x 5000

    =$200

    If nominal interest (interest before inflation) is 600. real interest (interest after adjusting for inflation will be nominal - inflation

    =$600 - $200 = $400

    real interest ratepaid is $400/$5000 x 100

    =0.08 x 100

    =8%
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