If you are promised a nominal return of 12% on a one year investment,and you expect the rate of inflation to be 3%,what real rate do you expect to earn?
A) 5.48%
B) 8.74%
C) 9.00%
D) 12.00%

Question

Quizplus · Accepted Answer

To calculate the real rate of return, we subtract the expected inflation rate from the nominal rate of return, and then divide by one plus the inflation rate. So, the real rate of return would be (12% - 3%) / (1 + 3%) = 8.74%. Choice B is the closest to this calculation.

If You Are Promised a Nominal Return of 12% on a One