Problem:
Imagine you borrow $500 from your roommate, agreeing to pay her back $500 plus 10 percent nominal interest in one year. Assume inflation over the life of the contract is expected to be 3.50 percent.
Required:
Question 1: What is the total dollar amount you will have to pay her back in a year? What percentage of the interest payment is the result of the real rate of interest? Explain comprehensively and show all workings.