• 2 If prices have risen by 63% over the last ten years, the real value of  

• the interest payments today is lower. One way of thinking about   2022 latest answers

• this is that ten years ago, Mark had to give up £1000 of goods and  

• services in order to pay the interest on this loan, which was 5% of  

• his pay (£1000/£20,000). Today, he has to give up fewer goods  

• and services in order to pay the interest: only 3% of his pay  

• (£1000/£33,000).  

• 3 You can use the simplifified formula in Section 5.2 of this chapter to  

• work out that the annual interest rate is 10% − 5% = 5% a year.  

• Interest is adding 10% a year to the cost of the loan, but in real  

• terms, inflflation is reducing the cost by 5% a year.