Please solve in detail 20 The CPI was 220 in 2012 and 231 in

Please solve in detail

20. The CPI was 220 in 2012 and 231 in 2013. Phil borrowed money $500 in 2012 and repaid the loan in 2013 for the total amount $550. The real interest rate of Phil\'s loan was (a) 5pei (b) -1 percent (c) 3.2 percent. (d) 5 percent.

Solution

Amount borrowed = $500

Amount repaid = $550

Time period = 1 year

Calculate the nominal interest rate -

Nominal interest rate = (Amount repaid/Amount borrowed)^1/t - 1 = (550/500)^1/1 - 1 = 1.1 - 1 = 0.1 or 10%

The nominal interest rate of Phil\'s loan is 10 percent.

Calculate the inflation rate -

Inflation rate = [(CPI in 2013 - CPI in 2012)/CPI in 2012] * 100 = [(231 - 220)/220] * 100 = 5%

The inflation rate is 5 percent.

Calculate the real interest of Phil\'s loan -

Real interest rate = Nominal interest rate - Inflation rate = 10% - 5% = 5%

The real interest rate of Phil\'s loan was 5 percent.

Hence, the correct answer is the option (d).