5 8 O P Shift Situation 1: Suppose the interest rate on your car loan is 18.00 p

Question

5 8 O P Shift Situation 1: Suppose the interest rate on your car loan is 18.00 percent and the inflation rate is 17.00 percent Calculate the real interest rate. places) % (Enter your response as a percentage rounded to two decimal Situation 2: Suppose the interest rate on your car loan is 8.00 percent and the inflation rate is 5.00 percent. Calculate the real interest rate. %. (Enter your response as a percentage rounded to two decimal places.) Situation 2 because the (2) is lower. Situation 1 will be (1) Now suppose you are JPMorgan Chase, and you are making car loans. Which situation above would you now prefer? JPMorgan Chase would prefer (3) (1) O the same as (2) O inflation rate (3) O situation 1 O Situation2 O worse than O better than O real interest rate O nominal interest rate

Explanation / Answer

Situation1. Real interest rate=r-inflation=18-17=1%

Situation 2- real interest rate=8-5=3%

Sittuation 1 will be better than situation 2 because the real interest rate is lower.

JP Morgan will prefer situation 1

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