Question

An investment offers a total return of 14.0 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 5.5 percent.
Required:
What does Janice believe the inflation rate will be over the next year?

Answer 1

Answer:

8.06%

Explanation:

According to the Fisher equation

( 1 + Total rate of return) = (1 + real rate of return) x ( 1 + inflation rate)

(1.14) = (1.055) x ( 1 + inflation rate)

Inflation rate = 1.080569 - 1 = 0.080569 = 8.06%