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If nominal and inflation rates were 11% and 1.5%, respectively, what was the true real return?...

If nominal and inflation rates were 11% and 1.5%, respectively, what was the true real return? Please show equation and work.

Solutions

Expert Solution

Solution:

The true real rate of return can be calculated using the Fisher equation given below i.e.,

( 1 + Real Rate ) = ( 1 + Nominal Rate ) / ( 1 + Inflation rate )

As per the information given in the question we have

Nominal Rate = 11 % = 0.11

Inflation rate = 1.5 % = 0.015                                

Real Rate of Return= To find

Applying the above values in the formula we have

1 + Real Rate = ( 1 + 0.11 ) / ( 1 + 0.015 )

1 + Real rate = ( 1.11 ) / ( 1.015 )

1 + Real rate = 1.0936                                 

Real Rate = 1.0936 – 1 = 0.936 = 9.36 %

Thus the true real return = 9.36 %

jeff jeffy answered 5 days ago
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