Question

The nominal rate of return is 8.00%. the real rate of return is 3.00%. calculate the rate of inflation?

Answer 1

The correct answer should be - 5%.

According to the Fischer Equation,

Nominal interest rate = Real interest rate + the expected inflation rate.

So, the Inflation rate = Nominal interest rate - real interest rate.

It is given in the question as Nominal rate = 8%

Real rate = 3%.

Inflation rate = 8% - 3% = 5%

So, the inflation rate should be 5%.

Answer 2

Rate of inflation = 5%

Explanation:

Given:

Nominal rate of return = 8.00% = 8 / 100 = 0.08

Real rate of return = 3.00% = 3 / 100 = 0.03  

Rate of inflation = ?

Computation of rate of inflation:

Real rate of return = Nominal rate of return - Rate of inflation

Rate of inflation = Nominal rate of return - Real rate of return

Rate of inflation = 8% - 3%

Rate of inflation = 5%

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