Assume the inflation rate is 100% per year and the nominal rate of interest is 700% per year. (This was also our apples example from Section 5.2.) Now, assume that there is also a 25% default rate. That is, 1 in 4 apples are returned with worms inside and will therefore not be sellable (and be worth $0). What is your real rate of return? What is the formula?

Assume the inflation rate is 100% per year and the nominal rate of interest is 700% per year. (This was also our apples example from Section 5.2.) Now, assume that there is also a 25% default rate. That is, 1 in 4 apples are returned with worms inside and will therefore not be sellable (and be worth $0). What is your real rate of return? What is the formula?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 8SQP

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