Imagine that you borrow $1,000 for one year and at the end of the year you repay the $1,000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid?

3%

Explanation:

Data provided as per the question

Nominal interest rate = 100%

Inflation rate = 7%

The computation of the real interest rate is shown below:-

Real interest rate = Nominal interest rate - Inflation rate

= 10% - 7%

= 3%

Therefore, for computing the real interest rate we simply deduct the inflation rate from the nominal interest rate.

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