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

Question

Suppose you were borrowing money to buy a car. Consider the folowing situations Situation 1: Suppose the interest rate on your car loan is 17.00 percent and the inflation rato 16.00 percent Cakulato % Emr yor so one an reas merest as ano se aan-me Situation 2: Suppose the interest rate on your car loan ts 700 percent and the infason rate is 4 00 percent Caladate the eal nteest rate % nter your sponse anpetentige o no, neooe-mt Situation 1 will be Situation 2 because the is lower better than the same as

Explanation / Answer

Situation 1: rate of interest = (17 - 16)% = 1%

Situation 2 : rate of interest = (7 - 4)% = 3%

Situation 1 will be worse than Situation 2 because the real interest rate is lower.

- The real interest rate :

Is equal to the nominal interest rate minus the inflation rate.

Correct ans is D).

- Suppose an economy has an inflation rate of 2.6% and a bank makes a loan with an interest rate of 7.2%, then the real interest rate is (7.2 - 2.6)% = 4.6%

-An average of the prices of the goods and services purchased by a typical family is the:

consumer price index

So correct ans is a) CPI

- Suppose CPI in 2008 = 189 and the CPI in 2009 = 197

So inflation rate over the period from 2008-2009 = ((197 - 189)/189 )*100 = 4.2%

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