Question

luigi is willing to lend klaus $5,000 for one year at a nominal rate of interest of 7 percent. both luigi and klause expect the rate of inflation to be 2 percent in the next year. if the actual rate of inflation over the year was 1 percent, what is the real return did luigi receive?

Answer 1

The real return is the difference between the nominal and actual rate of inflation. Therefore, the real return revived by Luigi will be 6%.

Given the Parameters :

• Nominal rate = 7%

• Actual rate of inflation = 1%

Real return = Nominal rate - Actual rate of return

Real Return = 7% - 1% = 6%

Therefore, the real return on Luigi's money would be 6%

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