**Answer:**

a) The total dollar amount = $513.2

b) The interest payment = $13.20

**Explanation:**

Use following formula to calculate the real interest rate:

1 + Real Interest rate = (1 + Nominal Interest rate ) / (1 + Inflation rate )

1 + Real Interest rate = (1 + 7% ) / (1 + 4.25% )

1 + Real Interest rate = (1 + 0.07 ) / (1 + 0.0425 )

1 + Real Interest rate = 1.07 / 1.0425

1 + Real Interest rate = 1.0264

Real Interest rate = 1.0264 - 1

Real Interest rate = 0.0264

Real Interest rate = 2.64%

a) The total dollar amount

A = P x ( 1 + r )^n = 500 x ( 1 + 0.0264)^1 = $513.2

b) The interest payment

Interest payment = $513.2 - $500 = $13.20