Question

Pretend that you’re a money lender. The nominal amount of interest you get on a loan...

Pretend that you’re a money lender. The nominal amount of interest you get on a loan you made to someone else is 5%. The rate of inflation during the year that you’ve made the loan is 3%. What is the real interest rate on your loan? Explain intuitively the difference between the nominal and real interest rate.

Homework Answers

Answer #1

Real interest rate = Nominal interest rate - Inflation rate

                            = 5% - 3%

                           = 2%

Thus, the real interest rate on your loan is 2%.

A real interest rate is adjusted to remove the effects of inflation, which reflects the real cost of funds to the borrower and real return to the lender.

On the other hand, a nominal interest rate refers to an interest rate that does not remove inflation.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose that a borrower and a lender agree on the nominal interest rate to be paid...
Suppose that a borrower and a lender agree on the nominal interest rate to be paid on a loan. Then inflation turns out to be lower than they both expected. (1) True or False: The real interest rate on this loan is lower than expected. The lender (2) gains/loses from this unexpected lower inflation, and the borrower (3) gains/loses under these circumstances. Inflation during the 1970s was much higher than most people had expected when the decade began. Homeowners who...
Over the next year, the real interest rate is 2% and the expected inflation rate is...
Over the next year, the real interest rate is 2% and the expected inflation rate is 5%. A. What is the nominal interest rate on a one-year loan? B. Assume that the actual inflation rate turns out to be 3%, instead of 5%. • Who benefits, the lender or the borrower? • What is the realized real interest rate on this loan?
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will...
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next year. Assume that there is a fall of 2 percentage points in the expected future inflation rate. How will the real interest rate be affected...
3. Distinction Between Real and Nominal Interest Rates a. Distinguish between a nominal versus a real...
3. Distinction Between Real and Nominal Interest Rates a. Distinguish between a nominal versus a real interest rate. b. If a bond gives you a 4% nominal annual interest rate and the inflation rate over the year is 2%, what is the real ex post rate of return you receive? Real Rate You Receive _______________ c. If an investor wants a real rate of return of 2% and expects inflation to be 2% next year, what nominal rate should the...
Assume you are borrowing money from a car dealer today to purchase a new car. It...
Assume you are borrowing money from a car dealer today to purchase a new car. It is expected that inflation will average 3% per year over the next five years – the life of the car loan. This inflation expectation has been built into the interest rate you are being charged on the five-year, fixed interest rate car loan – the rate, and therefore your monthly payment, cannot be changed. Based on the facts above, it will benefit the lender...
Describe the difference between nominal and real interest rates. Calculate the missing value in each of...
Describe the difference between nominal and real interest rates. Calculate the missing value in each of the following scenarios: Expected inflation is 4% and the nominal interest rate is 6%, what is the real interest rate? The real interest rate is 2% and the nominal interest rate is 3%, what is expected inflation? Expected inflation is -1% and the real interest rate is 1%, what is the nominal interest rate?
6. Suppose you walk into a bank to borrow money for a new car. The loan...
6. Suppose you walk into a bank to borrow money for a new car. The loan officer tells you that they will loan you $10,000 for the car at a simple interest rate of 5.3 percent per year. You must repay the loan at the end of the year. a) How much interest will you have to pay? b) The bank expects that the inflation rate will be 2.2 percent over the year. What does the bank think that the...
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will...
Boris Borrower and Lynn Lender agree that Lynn will lend Boris $10,000 and that Boris will repay the $10,000 with interest in one year. They agree to a nominal interest rate of 8%, reflecting a real interest rate of 3% on the loan and a commonly shared expected inflation rate of 5% over the next year. If the inflation rate is actually 6% over the next year, how does that lower-than-expected inflation rate affect Boris and Lynn? Who is better...
You are told that the nominal interest rates in Country A is 14%, and the nominal...
You are told that the nominal interest rates in Country A is 14%, and the nominal interest rates in Country B is 8 %. Economists estimate that the real interest rate is 2% per year in both countries. a) What would you expect inflation to be in Country A and Country B? b) If the exchange rate adjusts to keep the real prices of goods the same in the two countries, how would the exchange rate between Country A and...
Please explain the difference between the nominal and real interest rate in the short-run and the...
Please explain the difference between the nominal and real interest rate in the short-run and the long-run. How and why does the quantity theory help us understand the relationship between the money supply, interest rates and inflation? How and why are nominal interest rates so low in the U.S. today? Please all the tools at your disposal to demonstrate your understanding of the market today.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT
Active Questions
  • Consider insertsort. Suppose that the input array A has 1% probability to be monotonically decreasing. Show...
    asked 9 minutes ago
  • Your company is thinking of introducing a Bring Your Own Device (BYOD) policy. You have been...
    asked 15 minutes ago
  • Attached is the file GeometricObject.java. Include this in your project, but do not change. Create a...
    asked 17 minutes ago
  • Suppose the number of cars in a household has a binomial distribution with parameters n =...
    asked 20 minutes ago
  • HR needs some information on the new interns put into a database. Given an id, email,...
    asked 41 minutes ago
  • Problem solving strategies Questions years = input("Enter a number of years and I'll tell you how...
    asked 46 minutes ago
  • Calculate ?Hrxn for the following reaction: CH4(g)+4Cl2(g)?CCl4(g)+4HCl(g) Use the following reactions and given ?H?s. C(s)+2H2(g)?CH4(g)?H=?74.6kJC(s)+2Cl2(g)?CCl4(g)?H=?95.7kJH2(g)+Cl2(g)?2HCl(g)?H=?184.6kJ Express...
    asked 52 minutes ago
  • ASCII (American Standard Code for Information Interchange) has an encoding for every character of the alphabet,...
    asked 1 hour ago
  • Is home confinement with electronic monitoring a deterrent? Are there negatives to being confined to one’s...
    asked 1 hour ago
  • Social hostility can have severe lasting effects of interperpersonal relationship during our adolescence years, which if...
    asked 1 hour ago
  • - A series RLC circuit has R=15 ?, L=1.5 H, and C=15 ?F. (a) For what...
    asked 1 hour ago
  • TV Circuit has 30 large-screen televisions in a warehouse in Erie and 60 large-screen televisions in...
    asked 1 hour ago