Question

Pablo recently lent $5,000 to his friend Kristine to open a bakery. She promised to pay him back with interest within one year. Pablo and Kristine agreed on a nominal interest rate of 5.5 percent. If the annual rate of inflation is 0.5 percent, what kind of profit can Pablo expect to receive for his investment?

Answer 1

Real Interest Rate = Nominal Interest Rate - Inflation Rate

In this case, the nominal interest rate is 5.5 percent, and the inflation rate is 0.5 percent, so the real interest rate is:

Real Interest Rate = 5.5% - 0.5% = 5.0%

Therefore, Pablo can expect to receive a real interest rate of 5.0% on his loan to Kristine.

To calculate the amount of profit he will make, we need to multiply the loan amount by the real interest rate:

Profit = Loan Amount x Real Interest Rate

Profit = $5,000 x 5.0% = $250

Therefore, Pablo can expect to make a profit of $250 on his investment in Kristine's bakery.

Amswer may be slighty off

*IG: whis.sama_ent*

Answer 2

To calculate Pablo's profit on the loan, we need to take into account both the nominal interest rate and the inflation rate.First, we can calculate the amount of interest that Kristine will pay over the course of the year.Interest = Principal x Nominal Interest Rate

Interest = $5,000 x 5.5% = $275So Kristine will pay back $5,275 ($5,000 + $275) at the end of the year.However, we also need to adjust for inflation, which reduces the value of money over time. To calculate the real interest rate, we can subtract the inflation rate from the nominal interest rate:Real Interest Rate = Nominal Interest Rate - Inflation Rate

Real Interest Rate = 5.5% - 0.5% = 5%So the real interest rate on the loan is 5%. This means that after accounting for inflation, Pablo can expect to earn a profit of 5% on his $5,000 investment.Profit = Principal x Real Interest Rate

Profit = $5,000 x 5% = $250Therefore, Pablo can expect to earn a profit of $250 on the loan.