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CPI and the nominal interest rate

  • 10-12-2009 7:43pm
    #1
    Shimmy!
    Registered Users, Registered Users 2 Posts: 15 ✭


    Please help me with this problem, i have a test tomorrow... i know the answer is 8% but dont know why

    Samantha is lending Jack $1,000 for one year. The CPI is 1.60 at the time the loan is made. They expect it to be 1.68 in one year. If Samantha and Jack agree that Samantha should earn a 3% real return for the year, the nominal interest rate on this loan should be _____ percent.
    Tagged:


Comments

  • #2
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    Percentage change in the CPI: (1.68 - 1.60)/1.60 = 0.05 or 5%, and for a real return of 3% Samantha needs a nominal rate of 8%.


  • #3
    Shimmy!
    Registered Users, Registered Users 2 Posts: 15 ✭Shimmy!


    Thanks :)


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