An investment offers a 12% total return over the comingyear. Bill Morneau thinks the total real return on thisinvestment will be only 7%.What does Morneau believe the inflation rate will beover the next year? (Do not round intermediatecalculations. Round the final answer to 2 decimalplaces.)please use fisher equation

Answered: An investment offers a 12% total return…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

An investment offers a 12% total return over the coming
year. Bill Morneau thinks the total real return on this
investment will be only 7%.
What does Morneau believe the inflation rate will be
over the next year? (Do not round intermediate
calculations. Round the final answer to 2 decimal
places.)
please use fisher equation

Expert Solution

Step 1

Answer:

Given,

Nominal return on investment (i) = 12% = 0.12

Real return on investment (r) = 7% = 0.07

The Fisher equation is given below:

$(1 + i) = (1 + r) (1 + π) W h e r e, π = inflation rate (1 + 0.12) = (1 + 0.07) (1 + π) 1.12 = 1.07 (1 + π) (1 + π) = \frac{1.12}{1.07} π = \frac{1.12}{1.07} - 1 π = 1.046728 - 1 π = 0.046728 π = 4.67 %$

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