Dr. Ruth is going to borrow $7,200 to help write a book. The loan is for one year and the money can be borrowed at either the prime rate or the LIBOR rate. Assume the prime rate is 12 percent and LIBOR 2.5 percent less. Also assume there will be a $45 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).
a. What is the effective interest rate on the LIBOR loan?
b. Which loan has the lower effective interest cost? (Use 360 days in a year.)
Prime
LIBOR

He interest rate effect is the change in real gdp caused by the federal reserve adjusting target interest rates. is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level. is the change in exports and imports, resulting from changes in the interest rate caused by changes in the aggregate price level. is the change in investment spending and government purchases caused by changes in money demand. is the change in interest rates, caused by changes to government purchases.