Bob Meets with a Banker to Discuss the Terms of a 1-

question 128

Essay

Bob meets with a banker to discuss the terms of a 1- year loan. Bob and the banker both expect that inflation will be 4 percent over the next year and agree on a nominal interest rate of 9 percent. In actuality, the inflation rate is 5 percent over the next year.
(a) What was the expected real interest rate on the loan?
(b) What was the actual real interest rate on the loan?

---

Definitions:

Obesity

A medical condition characterized by excessive body fat that increases the risk of health problems such as heart disease and diabetes.

Grams

A metric unit of mass equal to one thousandth of a kilogram, used commonly in science and everyday life for measuring weight.

Very Low

typically describes a significantly reduced quantity, level, or intensity of something when compared to a standard or expected value.

Birthweight

The weight of a baby measured immediately after its birth, an important indicator of newborn health and developmental status.