An investment earned an average return of 20% per year. During the investment period, the real interest rate averaged 1.8% a year. To the nearest tenth of a percent, the implied average
Annual inflation rate was
A)17.9%.
B)1.2%.
C)1.8%.
D)22.2%.

Question

Quizplus · Accepted Answer

The formula for nominal interest rate is: 
Nominal interest rate = Real interest rate + Inflation rate 
Rearranging the formula we get: 
Inflation rate = Nominal interest rate - Real interest rate

Given, 
Nominal interest rate = 20% per year 
Real interest rate = 1.8% per year

Substituting these values in the formula, we get: 
Inflation rate = 20% - 1.8% = 18.2%

Rounding off to the nearest tenth, we get the implied average annual inflation rate to be 17.9%. thus the answer is A.

An Investment Earned an Average Return of 20% Per Year