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18 September, 19:34

Suppose the CPI is 100 this year and is expected to be 110 next year. I am making a loan to you and I want to earn a 6% annual real rate of interest. What annual nominal interest rate should I charge you?

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  1. 18 September, 22:15
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    nominal interest rate = 16%

    Explanation:

    real interest rate = nominal interest rate - inflation rate

    6% = nominal interest rate - 10%

    nominal interest rate = 16%

    The consumer price index (CPI) is used to measure the inflation rate. If this year's CPI = 100, and next year's CPI = 110, then the inflation rate = (110 - 100) / 100 = 10%
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