Tony Lent Dave $1,000 for One Year with the Understanding

question 26

Multiple Choice

Tony lent Dave $1,000 for one year with the understanding that Dave would repay $1,070.If the actual inflation rate was 7 percent,what was the real rate of interest Tony received?

• A)14 percent
• B)7 percent
• C)4 percent
• D)0 percent
• E)-7 percent

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Definitions:

Roth IRA

An individual retirement account allowing for tax-free withdrawals on qualified distributions, funded with after-tax dollars.

Tax-Free Withdraw

Taking money out of a financial account, such as a Roth IRA, without incurring tax liability on the distribution.

Nondeductible Contributions

Contributions to certain retirement accounts that cannot be deducted from current income taxes, but may potentially grow tax-free until withdrawal.

Tax Basis

The value of an asset for tax purposes, used to calculate gain or loss on the sale or other disposition of the asset.