Question

An investment offers a total return of 11 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 6 percent.

What does Janice believe the inflation rate will be over the next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Compute the exact inflation rate as follows:

$$ \begin{aligned} \text { Nominal rate of interest } &=(1+\text { real rate }) \times(1+\text { inflation rate })-1 \\ 11 \% &=(1+6 \%) \times(1+\text { inflation rate })-1 \\ \frac{1+11 \%}{(1+6 \%)}-1 &=\text { inflation rate } \\ \text { inflation rate } &=4.72 \% \end{aligned} $$

Thus, the inflation rate is \(4.72 \%\).