Suppose that you want to take out a loan and that your local bank wants to charge you an annual real interest rate equal to 3%. Assuming that the annualized expected rate of inflation over the life of the loan is 1%, determine the nominal interest rate that the bank will charge you. What was the actual real interest rate on the loan if, over the life of the loan, actual inflation is 0.5%?

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Asked Apr 1, 2019
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Suppose that you want to take out a loan and that your local bank wants to charge you an annual real interest rate equal to 3%. Assuming that the annualized expected rate of inflation over the life of the loan is 1%, determine the nominal interest rate that the bank will charge you. What was the actual real interest rate on the loan if, over the life of the loan, actual inflation is 0.5%?

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Expert Answer

Step 1

Compute the nominal interest rate:

 Nominal interest rate is calculated by using following formula:

 

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Step 2

Given, real interest rate is 3%, and inflation rate is 1%.

 

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Step 3

Therefore, the bank will charge nominal interes...

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