What is the real interest rate on a Credit Card loan bearing 24% interest per year, if the rate of inflation is 10% ?
240%
34%
14%
4%
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC CAPF – 2019
Real Interest Rate ≈ Nominal Interest Rate – Inflation Rate
Given:
Nominal Interest Rate = 24%
Inflation Rate = 10%
Real Interest Rate ≈ 24% – 10% = 14%
– Inflation erodes the purchasing power of money over time.
– The real interest rate reflects the actual increase in purchasing power received by the lender (or paid by the borrower) after accounting for inflation.
1 + Real Rate = (1 + Nominal Rate) / (1 + Inflation Rate)
1 + Real Rate = (1 + 0.24) / (1 + 0.10)
1 + Real Rate = 1.24 / 1.10
1 + Real Rate ≈ 1.12727
Real Rate ≈ 1.12727 – 1 = 0.12727 or 12.73%.
However, the approximate formula is commonly used, especially in multiple-choice questions where the options are spaced out, and it matches one of the options (14%) closely enough considering the approximation inherent in the question’s context.