Chapter 6, Problem 11QP

Summary Introduction

To determine: The inflation rate

Introduction:

Inflation refers to increase in the prices of goods in the economy. The rate at which the inflation increases is the inflation rate. Nominal rate refers to the rate of return on a bond instrument before adjusting the inflation rate.

Real rate refers to the rate of return on a bond instrument after adjusting the inflation rate. The Fisher effect helps to establish a relationship between the nominal rate of return, inflation, and the real rate of return.