Question

The Costaguanan stock market provided a rate of return of 90%.
The inflation rate in Costaguana during the year was 75%. In
Ruritania the stock market return was 13%, but the inflation rate
was only 2%.

**a.** Calculate the real rate of return for
Costaguanan stock market? **(Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal
places.)**

**b.** Calculate the real rate of return for Ruritania
stock market? **(Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal
places.)**

**c.** Which country's stock market provided the
higher real rate of return?

Answer #1

a) | |||

r = (i-g)/(1+g) | |||

Where, | |||

r = real interest rate | |||

i=nominal interest rate | |||

g= inflation rate | |||

= (0.9-0.75/ (1+0.75) | |||

=8.57% | |||

b) | |||

r = (i-g)/(1+g) | |||

Where, | |||

r = real interest rate | |||

i=nominal interest rate | |||

g= inflation rate | |||

= (0.13-0.02/ (1+0.02) | |||

=10.78% | |||

c) |
Ruritania stock market
provides higher real rate of return. |
||

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