The Iron Bank of Westeros charges the Lannister family $12 \%$ interest on their loans. The director of finance at the bank collected information about the economy in Westeros over the past year as shown in the table below.
\begin{tabular}{ll}
Variable & change \
\hline Real GDP growth rate & $3 \%$ \
Increase in the real GDP deflator & $7 \%$
\end{tabular}

What was the real interest rate that the Iron bank earned on these loans?
Choose 1 answer:
(A) $19 \%$
(B) $10 \%$
(C) $9 \%$
(D) $4 \%$
(E) $5 \%$

Question

The Iron Bank of Westeros charges the Lannister family $12 \%$ interest on their loans. The director of finance at the bank collected information about the economy in Westeros over the past year as shown in the table below.
\begin{tabular}{ll} 
Variable & change \
\hline Real GDP growth rate & $3 \%$ \
Increase in the real GDP deflator & $7 \%$
\end{tabular}

What was the real interest rate that the Iron bank earned on these loans?
Choose 1 answer:
(A) $19 \%$
(B) $10 \%$
(C) $9 \%$
(D) $4 \%$
(E) $5 \%$

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ To calculate the real interest rate, we use the Fisher equation, which relates the nominal interest rate (i), the real interest rate (r), and the inflation rate (π): $ r = i - π $. ‖ ‖ step 2 ⋮ The nominal interest rate charged by the Iron Bank is given as $ 12\% $. ‖ ‖ step 3 ⋮ The inflation rate can be approximated by the increase in the real GDP deflator, which is $ 7\% $. ‖ ‖ step 4 ⋮ Using the Fisher equation from step 1, we calculate the real interest rate: $ r = 12\% - 7\% = 5\% $. ‖ ∻Answer∻ ***E*** ∻Key Concept∻ ⚹Fisher Equation⚹ ∻Explanation∻ ⚹The Fisher equation is used to calculate the real interest rate by subtracting the inflation rate from the nominal interest rate.◊What formula can be used to calculate the real interest rate earned on loans in this scenario?⍭ Generate me a similar question◊⚹

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