Question

Statistics

Posted 3 months ago

```
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) $5 \%$
```

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Answer from Sia

Posted 3 months ago

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.

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