SOLUTION: Suppose I loaned Liz $600 and she paid me $630 after one year. During this time, the inflation rate was 4%. The REAL interest rate that I collected from Liz was _________.

Algebra ->  Finance -> SOLUTION: Suppose I loaned Liz $600 and she paid me $630 after one year. During this time, the inflation rate was 4%. The REAL interest rate that I collected from Liz was _________.      Log On


   

Question 1054703: Suppose I loaned Liz $600 and she paid me $630 after one year. During this time, the inflation rate was 4%. The REAL interest rate that I collected from Liz was _________.
Answer by Fombitz(32388) About Me  (Show Source):
You can put this solution on YOUR website!
So if there was no inflation, you would have received a %28%28630-600%29%2F600%29%2A100=5
5% interest rate
With the inflation, the actual rate is 5-4=1
1% real interest rate.
.
.
.
The real interest rate using the Fisher equation is,
r=%281%2Bi%29%2F%281%2BI%29-1=%281%2B0.05%29%2F%281%2B0.04%29-1=0.009615
0.96% real interest rate.