Question

You're considering an investment that you expect will produce an 8% return next year, and you expect that your real rate of return on this investment will be 6%. What do you expect inflation to be next year, using the actual equation

Answer 1

Answer:

Explanation:

Using Fisher equation (Which is estimating the financial mathematics and economics relationship among real interest rates nominal interest rates under inflation.) which goes like this

$1+i=(1+r)(1+\pi _{e} )$

where

$i = nominal interest rate\\e = real interest rate\\\pi _{e} = expected inflation rate$

Inflation = (1+0.08) / (1+0.06) - 1 = 1.88% (Could be approximated as 2%)