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The true cost of borrowing and lending is best measured by a. the​ three-month u.s. treasury bill rate. b. the real interest rate. c. the inflation rate. d. the nominal interest rate.

Curtis Rhodes

in Business

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Justin Parker on January 20, 2018

The true cost of the loans and the loans are measured by the real interest rate. Real interest rate adjusts the nominal interest rate by inflation. (Real interest=Nominal interest-Inflation) Let's look at two examples: Example 1 : Nominal rate of interest is 5% and CPI inflation at 2.8%. Example 2 : Nominal interest rate stays at 5% and CPI inflation at 3.5%. During the Instance 2, for a humble lender, although it seems that he is not affected, inflation has taken some purchasing power, while the interest you earn is the same. Also, a low rate of inflation will have a visible impact for the borrower and for the benefit of the lender. In contrast, if we take real interest into account, in the first instance there was a real interest rate of 2.2% and of the second instance has had a real interest rate of 1.5 per cent, which explicitly shows the impact of the higher inflation rate, and thus reflects the true cost of the loan/loans.


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