If a share of stock provided a 14.0 percent nominal rate of return over the previous year while the real rate of return was 6.0 percent, then the inflation rate was:
A)1.89 percent.
B)7.55 percent.
C)8.00 percent.
D)9.12 percent.

Question

Quizplus · Accepted Answer

The nominal rate of return is the actual return earned on a stock. The real rate of return is the nominal rate of return adjusted for inflation.

We can use the following formula to calculate the real rate of return:

(1 + nominal rate) = (1 + real rate) x (1 + inflation rate)

Plugging in the values we know:

(1 + 0.14) = (1 + 0.06) x (1 + inflation rate)

Simplifying:

1.14 = 1.06 x (1 + inflation rate)

Dividing by 1.06:

1.0754717 = 1 + inflation rate

Subtracting 1:

inflation rate = 0.0754717 or 7.55%

Therefore, the inflation rate was 7.55%.

If a Share of Stock Provided a 14