Inflation and Nominal Returns

Question

Suppose the real rate on your investment is 5.5 percent and the inflation rate is 1.6 percent. What nominal rate would you expect to see on your investment? Use the Fisher Effect Formula.

 

6.11%
7.19%
7.91%
6.47%
8.27%

Answer 1

1+ nominal rate  = (1 + real rate) * (1 + inflation) = (1 + .055) * (1  + .018) = 1.07188

 

nominal rate = .07188 = 7.19%