Question

An investment offers a total return of 15 percent over the coming year. Janet Jello thinks the total real return on this investment will be only 7.7 percent.
What does Janet believe the inflation rate will be over the next year?

Answer 1

Answer:

6.78%

Explanation:

Data provided in the question:

Total return i.e nominal rate = 15% = 0.15

Real return = 7.7% = 0.077

Now,

Inflation rate = $\frac{\textup{1 + Nominal rate}}{\textup{1 + Real return }}$  - 1

on substituting the respective values, we get

Inflation rate = $\frac{\textup{1 + 0.15}}{\textup{1 + 0.077}}$  - 1

or

Inflation rate = [ 1.15 ÷ 1.077 ] - 1

or

Inflation rate = 0.0678

or

Inflation rate = 0.0678 × 100% = 6.78%