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14 May, 16:43

Frank is lending $1,000 to Sarah for two years. Frank and Sarah agree that Frank should earn a real return of 4 percent per year. Instructions: a. The CPI (times 100) is 100 at the time that Frank makes the loan. It is expected to be 113 in one year and 127.7 in two years. What nominal rate of interest should Frank charge Sarah?

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  1. 14 May, 17:12
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    nominal rate of interest is 31.7 %

    Step-by-step explanation:

    given data

    payment = $1000

    time = 2 year

    rate = 4%

    CPI = 100

    CPI final yer = 127.7

    to find out

    nominal rate of interest

    solution

    we know nominal rate of interest formula that is

    nominal rate of interest = real interest rate + inflation rate ... 1

    so here inflation rate is express as

    inflation rate = (CPI final year - CPI) / CPI * 100 ... 2

    put here value

    inflation rate = (127.7 - 100) / 100 * 100

    inflation rate is 27.7 %

    so from equation 1

    nominal rate of interest = real interest rate + inflation rate

    nominal rate of interest = 4% + 27.7%

    nominal rate of interest is 31.7 %
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