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What is the real interest rate

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Steve wants to borrow $1,000 from Harry and promises to repay the borrowed money plus interest a year from now. During the course of the year Harry anticipates that inflation will be 15% while Steve anticipates that inflation will be 12%. Use this information to answer this series of questions:

a) Steve is willing to pay a 5% for this loan. If Harry charges Steve a nominal interest rate of 17%,will Steve borrow the money?

b) Steve has agreed to pay Harry $1,100 at the end of the year. If Harry loans Steve $1,000 at the beginning of the year. If inflation is 15% for the year, what is the real interest rate that Steve will pay for this loan?

Reference no: EM131067815

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