Question

Imagine you borrow $1,200 from your roommate, agreeing to pay her back $1,200 plus 10 percent nominal interest in one year. assume inflation over the life of the contract is expected to be 6.04 percent. what is the total dollar amount you will have to pay her back in a year? what percentage of the interest payment is the result of the real rate of interest?

Answer 1

To find the real interest rate on the loan subtract the inflation rate from the nominal interest. 10-6.04=3.96% To find the interest: 1,200* .0396=47.52 1,200+47.52=1,247.52 Total amount of loan.