Question

Consider an individual who borrowed $$25,000 to purchase a used car at a fixed interest rate of 9%. If inflation is 9%, what is the real interest rate the individual will be paying

Answer 1

The real interest rate is 0%

Step-by-step explanation:

To calculate the real interest rate, we can use the following formula:

Real Interest Rate = [(1+nominal interest rate)/(1-+inflation rate)]-1

Now, we plug the amounts into the formula:

Real Interest Rate = [(1+0.09)/(1+0.09)]-1

=[1.09/1.09]-1

=1-1

=0

Thus, the Real Interst Rate is equal to 0%