Keegan Received $25,000 by Way of an Employee Loan at a Rate

question 2

Multiple Choice

Keegan received $25,000 by way of an employee loan at a rate of 1% interest when the CRA's prescribed rate of interest was 3%.Keegan is in a 40% income tax bracket.What is the actual cost (rate) of Keegan's loan? (Assume there are no fluctuations in the prescribed rate of interest.)

• A)1%
• B)1.2%
• C)1.8%
• D)2%

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Definitions:

Interest Rate

The part of a loan that is added as interest for the borrower, normally expressed as an annual percentage of the existing loan balance.

Reserve Ratio

The reserve ratio is the fraction of total deposits that a bank is required to hold in reserve and not loan out, acting as a regulatory tool to ensure the stability of the banking system.

Bank Reserves

Funds that banks hold to meet immediate withdrawal demands and regulatory requirements.

Money Supply

The total amount of money—coins, currency, and bank deposits—circulating in an economy.