Question

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

Answer 1

Assuming the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is 6%.

Real rate of interest

Using this formula

Real rate of interest=Interest on all loans-General price level rate

Where:

Interest on all loans=10%

General price level rate=4%

Let plug in the formula

Real rate of interest=10%-4%

Real rate of interest=6%

Inconclusion the real rate of interest in Agronomia is 6%.

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