Question

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?

Answer 1

To calculate the real rate of interest, subtract the inflation rate from the nominal interest rate. In this case, the real rate of interest is 4.44%.

Step-by-step explanation:

To calculate the real rate of interest, we need to first calculate the inflation rate. In this case, the inflation rate can be calculated using the Consumer Price Index (CPI) formula:

Inflation rate = ((CPI_end - CPI_start) / CPI_start) * 100

Substituting the given values, the inflation rate is ((190 - 180) / 180) * 100 = 5.56%

Next, to calculate the real rate of interest, we subtract the inflation rate from the nominal interest rate:

Real rate of interest = Nominal interest rate - Inflation rate

Substituting the given values, the real rate of interest is 10% - 5.56% = 4.44%