Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid

8%

Explanation:

Amount borrowed. $5000

Time = one year

Interest paid = $600

Inflation rate = 4%

The inflation rate is equivalents to

4/100 x 5000 x 1 year

= 0.04 x 5000

=$200

If nominal interest (interest before inflation) is 600. real interest (interest after adjusting for inflation will be nominal - inflation

=$600 - $200 = $400

real interest ratepaid is $400/$5000 x 100

=0.08 x 100

=8%