Question

Suppose you were borrowing money to buy a car. Consider the following situations.

Situationâ 1: Suppose the interest rate on your car loan is percent and the inflation rate is percent.

Required:
Calculate the real interest rate.

Answer 1

Answer: 1%

Step-by-step explanation:

The real interest rate is the nominal interest rate adjusted for inflation so that a person might know how much of the interest is not eroded by inflation.

Real Interest rate = Nominal Interest rate - inflation

= 18% - 17%

= 1%