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Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is

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abiolataiwo2015

Answer:

3%

Explanation:

Calculation to determine what the Annual real interest rate is

Using this formula

Annual real interest rate = Annual nominal interest rate - expected annual inflation rate

Let plug in the formula

Annual real interest rate=8%-5%

Annual real interest rate=3%

Therefore Annual real interest rate is 3%

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