The table below shows hypothetical levels of average household debt and debt-ser

Question

The table below shows hypothetical levels of average household debt and debt-service payments in two years, 2005 and 2008. Assume households are paying only interest on their debt and not part of the principal.

Annual debt-service payments

At what annual interest rate would consumers have had to borrow for the debt-service payments in 2008 to equal the debt-service payments in 2005, despite the increase in household debt?

Instructions: Round your answer to two decimal places.

__ percent.

Annual debt-service payments

Explanation / Answer

Calculate the percentage debt on household debt:

In 2005:

Percentage on debt = Annual debt service payments / household debt *100

= $700 / $40,000 *100

= 1.75%

Therefore, the percentage of debt is 1.75%.

In 2008:

Percentage on debt = Annual debt service payments / household debt *100

= $700 / $70,000 *100

= 1.00%

Therefore, the percentage of debt is 1.00%.

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