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3 May, 10:01

Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid?

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  1. 3 May, 11:23
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    3%

    Explanation:

    Data provided as per the question

    Nominal interest rate = 100%

    Inflation rate = 7%

    The computation of the real interest rate is shown below:-

    Real interest rate = Nominal interest rate - Inflation rate

    = 10% - 7%

    = 3%

    Therefore, for computing the real interest rate we simply deduct the inflation rate from the nominal interest rate.
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