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An investment offers a total return of 13.5 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 5.0 percent. What does Janice believe the inflation rate will be over the next year?

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Answer:

8.10%

Explanation:

Fisher equation is applicable in this question. It  shows the relationship between nominal interest rate, real interest rate and inflation rate.

Fisher equation is as follows;

Inflation rate = [ (1+ Nominal) /(1+ Real)] -1

Inflation rate = [(1+0.135) *(1+0.05)] -1

Inflation rate = (1.135/1.05 ) -1

Inflation rate = 1.08095 -1 = 0.08095 ; which is 8.10%

Therefore, the Inflation rate is 8.10%

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