An investment offers a total return of 17 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 12 percent.

An investment offers a total return of 17 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 12 percent.

 What does Janice believe the inflation rate will be over the next year?

Explanation

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is:

(1 + R) = (1 + r)(1 + h)

h = (1 + .17)/(1 + .12) – 1

h = .0446, or 4.46%

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