Question

If the price of a shmoo increases from $100 to $120 during a year and if the simple nominal return on a bank deposit is 50% during the same year, then the simple real return from the deposit is:

Answer 1

The simple real return from the deposit is -0.5833, indicating a loss.

Step-by-step explanation:

To calculate the simple real return from the deposit, we need to use the formula for real return:

Real Return = (1 + Nominal Return) / (1 + Inflation Rate) - 1

In this case, the nominal return is 50% and the price increase is 20% (from $100 to $120). To find the inflation rate, we can use the formula:

Inflation Rate = (Price Increase / Initial Price) * 100

Plugging in the values, we get:

Inflation Rate = (20 / 100) * 100 = 20%

Now we can calculate the real return:

Real Return = (1 + 0.50) / (1 + 0.20) - 1 = 0.5 / 1.2 - 1 = 0.4167 - 1 = -0.5833

Therefore, the simple real return from the deposit is -0.5833, indicating a loss.