If the expected inflation rate is 4 percent for next year, then
A)a return of 4 percent will give a real return of 1 percent.
B)a return of 8 percent will give a real return of 4 percent.
C)a return of 3 percent will give a return of negative 2 percent.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

In order to calculate the real return, we need to subtract the inflation rate from the nominal return. Therefore, a return of 8 percent minus an inflation rate of 4 percent would give a real return of 4 percent. Choice A is incorrect because 4 percent nominal return minus 4 percent inflation rate would give a real return of 0 percent, not 1 percent. Choice C is incorrect because a return of 3 percent minus an inflation rate of 4 percent would give a negative real return of 1 percent.

If the Expected Inflation Rate Is 4 Percent for Next