Question

If your nominal rate of return is 8.68 percent and your real rate of return is 2.05 percent, what is the inflation rate? A.6.29% B.6.50% C.6.63% D.16.77% E.5.32%

Answer 1

The inflation rate can be calculated by subtracting the real rate of return from the nominal rate of return. In this case, the inflation rate is 6.63%.

Step-by-step explanation:

To calculate the inflation rate, we can use the formula:

Inflation Rate = Nominal Rate of Return - Real Rate of Return

In this case, the nominal rate of return is 8.68 percent and the real rate of return is 2.05 percent. So, the inflation rate would be:

Inflation Rate = 8.68% - 2.05% = 6.63%

Answer 2

The inflation rate is found by subtracting the real rate of return from the nominal rate of return, which in this instance yields an inflation rate of 6.63%, making option C the correct answer.

Step-by-step explanation:

To determine the inflation rate, given the nominal rate of return and the real rate of return, we use the Fisher equation, which states that the nominal rate (i) is approximately equal to the sum of the real rate (r) plus the inflation rate (π):

i ≈ r + π

With a nominal rate of return of 8.68 percent and a real rate of return of 2.05 percent, we can rearrange the Fisher equation to solve for the inflation rate (π):

π ≈ i - r

π ≈ 8.68% - 2.05%

π ≈ 6.63%

Therefore, the correct answer is C.6.63%.