D) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation per year, and the actual rate of inflation ends up
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Could you please show how the problem is worked out, and why it equals 8 percent?

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real interest.jpg

D) A firm signs a 3-year contract with a union based on a 2 percent anticipated rate of inflation
per year, and the actual rate of inflation ends up being 7 percent per year.
86) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus
$600 of interest. If the inflation rate was 4%, what was the real interest rate you paid?
A) 16 percent
B) 12 percent
C) 8 percent
D) 6 percent

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