Jimmy Borrowed $50,000 to Add a Room to His House

Multiple Choice

Jimmy borrowed $50,000 to add a room to his house. He financed the loan over 3 years at 7 percent per year. He expects a 2 percent inflation rate each year for the next 3 years. It follows that he expects to pay an annual real interest rate of

A) 8 percent.
B) 9 percent.
C) 4.5 percent.
D) 5 percent.