Suppose that you took out a $1,000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is CORRECT?
A. The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
B. The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
C. The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent.
D. The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent.
Ans: B. The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
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