Final answer:
To determine the real interest rate, subtract the inflation rate (33.33%) from the nominal interest rate (28%) to get -5.33%. The bank's real interest rate is thus -5.33%, reflecting a decrease in the purchasing power of the money lent.
Step-by-step explanation:
To calculate the bank's real interest rate, we must consider both the nominal interest rate that the bank is charging and the inflation rate for the time period in question. The nominal interest rate given is 28.00 percent in year 2. The CPI (Consumer Price Index) is used to calculate inflation rate, which is the percentage change in the index number from year 1 (CPI = 120) to year 2 (CPI = 160).
Using the provided information, we can determine the inflation rate as follows:
- Inflation rate = (CPI year 2 - CPI year 1) / CPI year 1
- Inflation rate = (160 - 120) / 120
- Inflation rate = 40 / 120
- Inflation rate = 0.3333 or 33.33%
Having both the nominal interest rate and the inflation rate, we can find the real interest rate using the formula:
Real Interest Rate = Nominal Interest Rate - Inflation Rate
Real Interest Rate = 28.00% - 33.33%
Real Interest Rate = -5.33%
Therefore, the bank's real interest rate is -5.33% percent, indicating that in real terms, the value of the money lent is expected to decrease over the year in question, essentially reflecting that with the inflation, the purchasing power of the interest earned would be negative.