If the real return on government bonds is 14 percent while the rate of expected inflation is anticipated to be 8 percent, then what should nominal rate of return be?

Question

Quizplus · Accepted Answer

The nominal rate of return can be calculated using the Fisher equation: Nominal rate = Real rate + Expected inflation rate.
So, in this case, Nominal rate = 14% + 8% = 22%.
However, this is not the correct answer because we have to add 1 to the expected inflation rate before multiplying by the real rate. This is because real rate is expressed as a decimal, while the Fisher equation requires that we consider the growth factor of the inflation rate. So, the correct calculation is as follows:
Nominal rate = (1 + Real rate) x (1 + Expected inflation rate) - 1.
Hence, Nominal rate = (1 + 0.14) x (1 + 0.08) - 1 = 23.12%. 
Therefore, the best choice is C) 23.12%.

If the Real Return on Government Bonds Is 14 Percent