An investment offers a total return of 13.5 percent over the coming year. Janice Yellen thinks...

An investment offers a total return of 13.5 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 5.5 percent. What does Janice believe the inflation rate will be over the next year?

Expert Solution

(1 + Nominal rate of return) = (1 + Real rate of return)(1 + Inflation rate)

(1 + 0.135) = (1 + 0.055)(1 + Inflation rate)

Inflation rate = [(1 + 0.135) / (1 + 0.055)] - 1

Inflation rate = 0.0758 or 7.58%

jeff jeffy answered 2 years ago

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