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Unformatted text preview: By charging an interest rate at least equal to the rate of inflation, this problem is corrected. For example, say a loan is made for $10,000 at 5% interest, inflation is 5%, and the loan is paid back after one year. When the loan is made, it can purchase $10,000 worth of goods, such as a compact car (again). After a year of inflation at 5%, the same compact car costs $10,500. At the same time, one year later, the loan is repaid in full plus interest, totaling $10,500. In this case, the effects of inflation and the interest rate counteract each other so that the real value of the money stays the same even though the nominal value of the money increases by $500. Two different interest rates are used in the discussion of loans. The nominal interest rate is the interest rate reported when a loan is made. This rate does not take into account is the interest rate reported when a loan is made....
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10