An investment offers a 11 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 8.4 percent.

An investment offers a 11 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 8.4 percent.

Required:

What does Bill believe the inflation rate will be over the next year? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Inflation rate

%

Explanation:

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

h = [(1 + 0.11) / (1 + 0.084)] – 1

h = 0.0240 or 2.40%