Suppose I want to borrow money from the bank for one year, but only if the real interest rate is 6 percent or less. The bank quotes me a nominal interest rate of 10 percent. The CPI is currently 185, and economists forecast that next year the CPI will be 190. Assuming that I agree with the economists' forecasts, should I take the loan? Justify your answer.
I've tried to figure this out on my own, but I just think that I can't grasp the concept?
2007-02-15 10:49:32 · 2 answers · asked by kate 2 in Social Science ➔ Economics
Ouch, please tell me you're still in grade school and haven't got to percents yet.
2007-02-15 14:01:23 · answer #1 · answered by KevinStud99 6 · 0⤊ 1⤋
Kate, you should first find the inflation rate:
190/185-1=0.027=2.7%
Then, you should discount the nominal interest rate of 10% (.1)with the inflation rate:
(1+.1)/(1+.027)=1.071
So the real interest rate is 1.071-1=.071=7.1%
You shouldn't take the loan!
2007-02-16 19:11:32 · answer #2 · answered by daniel_cohadier 3 · 0⤊ 0⤋