An artist buys scrap metal from a local steel mill as a raw material for her scu

Question

An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last year, she purchased $5,000 metal. With the steel she produced 10 authentic sculptures that she sold for $800 each to a local art dealer, then sold all of the sculptures to art collectors for an average of $1,000 each. The total value added of the artist is $2000. (Enter your response as an integer.) The real interest rate is the interest rate that adjusts GDP for changes in prices. is the interest rate that is quoted on a financial debt and a firm's assets. is equal to the nominal interest rate minus the inflation rate. is equal to the inflation rate minus the nominal interest rate. Suppose an economy has an inflation rate of 3.5% and a bank makes a loan with an interest rate of 6.2%. In this case, the real interest rate is |3.2|%. (Enter your response rounded to one decimal place.)

Explanation / Answer

Cost to the artist = $5000

Price at which she sells the sculptures = $800

Value at buying the steel = $5000

Value at selling = 800 x 10 = $8000

Value added by artist = 8000 – 5000 = $3000

The real interest rate is equal to the nominal interest rate minus the inflation rate.

Inflation rate = 3.5%

Interest rate = 6.2%

Real interest rate = 6.2 – 3.5 = 2.7%

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