An investment offers a 13.5 percent total return over the coming year. Bill Bern

Question

An investment offers a 13.5 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Bill believe the inflation rate will be over the next year?

A, 6.03%

B. 9.90%

C. 11.20%

D. -7.93%

E. 8.61%

An investment offers a 13.5 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Bill believe the inflation rate will be over the next year?

A, 6.03%

B. 9.90%

C. 11.20%

D. -7.93%

E. 8.61%

Explanation / Answer

Inflation rate will be over the next year = (1+nominal Rate)/(1+real return) -1

Inflation rate will be over the next year = (1+13.5%)/(1+4.5%) - 1

Inflation rate will be over the next year = 8.61%

Answer

E. 8.61%

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