Question

An investment offers a total return of 12.0 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 6.0 percent. What does Janice believe the inflation rate will be over the next year?

Answer 1

inflation rate= 0.06= 6%

Step-by-step explanation:

Giving the following information:

Interest rate= 12%

Real rate of return= 6%

The inflation rate is counterproductive to the interest rate. The inflation rate reduces the purchasing price, therefore it decreases the interest rate effect on nominal money.

Real interest rate= interest rate - inflation rate

0.06 = 0.12 - inflation rate

inflation rate= 0.12 - 0.06

inflation rate= 0.06= 6%