Let’s assume that the real rate of return is a constant 20%. If inflation is 50%, then the nominal rate of return is 80% (because (1+0.50)*(1+0.20) = 1.80). Therefore, you get $180 over a one year period for a $100 investment. Assuming income taxes to the tune of 40%, compute the real value of your investment (after taxes on nominal income have been paid) at the end of the year. Now contrast the same scenario but without any inflation, what would the value of your investment be at the end of the year. What lesson can we learn comparing these two scenarios? Do all calculation.Answer must be correct
Let’s assume that the real rate of return is a constant 20%. If inflation is 50%, then the nominal rate of return is 80% (because (1+0.50)*(1+0.20) = 1.80). Therefore, you get $180 over a one year period for a $100 investment. Assuming income taxes to the tune of 40%, compute the real value of your investment (after taxes on nominal income have been paid) at the end of the year. Now contrast the same scenario but without any inflation, what would the value of your investment be at the end of the year. What lesson can we learn comparing these two scenarios? Do all calculation.Answer must be correct
Chapter13: Inflation
Section: Chapter Questions
Problem 10SQ
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Let’s assume that the real
Do all calculation.Answer must be correct.
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