Question

Suppose you have a mortgage of $90,000. The expected inflation rate is equal to 3 percent and the nominal interest rate on the mortgage is 6 percent. Calculate the real interest rate on your mortgage: percent. (Enter your response as an integer.) Suppose you have a mortgage of $90,000. The expected inflation rate is equal to 4 percent and the real interest rate the mortgage is 4 percent. Calculate the nominal interest response as an integer.)

Answer 1

Question 1

Expected inflation rate = 3%

Nominal interest rate = 6%

Calculate the real interest rate -

Real interest rate = Nominal interest rate - Expected inflation rate

Real interest rate = 6% - 3% = 3%

Thus,

The real interest rate on your mortgage is 3 percent.

Question 2

Expected inflation rate = 4%

Real interest rate = 4%

Calculate the nominal interest rate -

Nominal interest rate = Real interest rate + Expected inflation rate

Nominal interest rate = 4% + 4% = 8%

Thus,

The nominal interest rate on mortgage is 8 percent.