Question

Luigi is willing to lend Klaus $5,000 for one year at a nominal rate of interest of 7%. Both Luigi and Klause expect the rate of inflation to be 2% in the next year. If the actual rate of inflation over the year was 1%, what is the real return did Luigi receive

Answer 1

Answer:

6%

Explanation:

In order to calculate the real return we would simply subtract the actual rate of inflation from the nominal rate of interest that has been calculated. In this scenario, the nominal rate is 7% and the actual inflation that year was 1% therefore the real return is 6%. This is the actual amount of return that Luigi will profit from the amount that he lent clause in the span of 1 year.

7% - 1% = 6%

Answer 2

The real return that Lugi received is 6%.

To determine the Real return we are going to minus Nominal rate of interest from the Actual rate of inflation.

Using this formula

Real return= Nominal rate of interest - Actual rate of inflation

Where:

Nominal rate of interest=7%

Actual rate of inflation=1%

Let plug in the formula

Real return=7%-1%

Real return=6%

Inconclusion the real return that Lugi received is 6%.

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