Question

If you lend money at a 9​% nominal interest​ rate, but you expect inflation to be 6​% over the life of the​ loan, then you expect your purchasing power to grow at a rate of_________.

Answer 1

Our purchasing power is expected to grow at a rate of 2.83%

Step-by-step explanation:

In this question we need to find at what rate is our purchasing power is growing at or in other words at what is the real interest rate. The formula for real interest rate is

1+Real interest rate = (1+Nominal interest rate)/(1+Inflation rate)

1+Real interest rate = (1.09)/(1.06)= 1.028

Real interest rate = 1.028-1

Real interest rate = 0.028 or 2.83%