Question

You take out student loans to help pay for your degree at a 5% annual interest rate. Assume the bank expected inflation to average 3% per year. What real interest rate did the bank expect to earn from your loan

Answer 1

Real interest rate= 0.02 = 2%

Step-by-step explanation:

Giving the following information:

Nominal interest rate= 5%

Inflation rate= 3%

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

Real interest rate= nominal interest rate - inflation rate

Real interest rate= 0.05 - 0.03

Real interest rate= 0.02 = 2%