Question

The CPI is 120 in year 1 and 150 in year 2. All inflation is anticipated. If Gringotts Bank charges an interest rate of 20.00 percent in year​ 2, the​ bank's real interest rate is nothing​%. ​(Round your response to two decimal places and include a minus sign if necessary.​)

Answer 1

Answer:

Gringotts Bank real interest rate = 20% - 25% = -5%

Explanation:

real interest rate = nominal interest rate - inflation rate

the inflation rate between year 1 and year 2 = [(CPI year 2 - CPI year 1) / CPI year 1] x 100 = [(150 - 120) / 120] x 100 = (30 / 120) x 100 = 0.25 x 100 = 25%

Gringotts Bank real interest rate = 20% - 25% = -5%

since the interest rate is negative, that means that Gringott Bank is actually losing money by lending it at 20% since the inflation rate is much higher.