An investment offers a 10 percent total return over the comi

An investment offers a 10 percent total return over the coming year. Jim Flaherty thinks the total real return on this investment will be only 6 percent.

What does Jim believe the inflation rate will be over the next year? (Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Solution

(1 + Real return) = (1 + nominal return) / (1 + inflation rate)

or, (1 + inflation rate) = (1 + nominal return) / (1 + real return)

or, (1 + inflation rate) = (1 + 0.10) / (1 + 0.06)

or, 1 + inflation rate = 1.0377358

or, Inflation rate = 0.0377358 or 3.77%