The 1-year risk-free rate of return in Hobbiton is 10% and the 1-year risk-free rate of return in Gondor is 20%.If the expected rate of inflation in Hobbiton is 5%,the what should be the expected rate of inflation in Gondor? Round to the nearest .01%

Question

Quizplus · Accepted Answer

(1 + Inflation_Gondor)/ (1 + Inflation_Hobbiton)= (1 + Rate_Gondor)/ (1 + Rate_Hobbiton) (1 + Inflation_Gondor)/ 1.05= 1.2/1.1 ====> Inflation_Gondor = .1454545

The 1-Year Risk-Free Rate of Return in Hobbiton Is 10