Question

The consumer price index was 120 in 2013 and 126 in 2014. The nominal interest rate during this period was 8 percent. What was the real interest rate during this period?

Answer 1

Answer:

3 percent

Explanation:

A real interest rate is an interest rate which doesn't have impact of inflation and depicts the real cost of funds to the borrower and the real yield to the lender or an investor.

Inflation = (126-120)/120 = 5%

Real Interest Rate = Nominal Interest Rate - Inflation

                               = 8% - 5%= 3%