ANSWER:

$$\text{Real Interest Rate}=\text{Nominal Interest Rate}-\text{Inflation Rate}$$

Calculations:

a. The nominal rate of interest is 12 percent and the inflation rate is 9 percent:

$$\text{Real Interest Rate} = 12\% - 9\% = 3\%$$

b. The nominal rate of interest is 15 percent and the inflation rate is 14 percent:

$$\text{Real Interest Rate} = 15\% - 14\% = 1\%$$

c. The nominal rate of interest is 5 percent and the inflation rate is 1 percent:

$$\text{Real Interest Rate} = 5\% - 1\% = 4\%$$

d. The nominal rate of interest is 20 percent and the inflation rate is 25 percent:

$$\text{Real Interest Rate} = 20\% - 25\% = -5\%$$

Analysis:

• Option d has the lowest real interest rate (-5%), meaning the borrower effectively pays back less in real terms due to high inflation relative to the nominal interest rate.