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3 May, 21:17

Suppose Compu-Global-Hyper-Mega-Net borrows $100,000 from Mel's Savings and Loan for one year at a 10% interest rate. At the end of the year; the owner, Mr. Simpson, has to repay $110,000. Of the course of that same year, the average level of prices increases by 10%. What is the real interest rate of the loan?

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  1. 4 May, 00:01
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    The real interest rate of the loan is 0%

    Explanation:

    1. Let's review the information given to us to answer the question correctly:

    Amount of the loan received by Compu-Global-Hyper-Mega-Net = US$ 100,000

    Interest rate of the loan = 10% annually

    2. Of the course of that same year, the average level of prices increases by 10%. What is the real interest rate of the loan?

    Let's use the formula of the real interest rate:

    Real interest rate = Standard interest rate - Inflation or Increase on prices

    Real interest rate = 10 - 10

    Real interest rate = 0%
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