Question

Define inflation? compare and contrast the real rate of return, the nominal rate of return, and the ex ante nominal rate of return, using either real-life examples or hypothetical examples.

Answer 1

Inflation is one of the important conecpt in the economy. Inflation can arise from two situations. First one is the expected rise in the prices of goods and services. Second is the decraese in purcasing power of the currency.

Nominal rate of return = It is the stated return that a financial institutions offers such as bank offering 10% interest rate is the nominal one.

Real rate of return = It is the return after taking inflation into consideration. If the inflationis 2% then the real return will be close to 8%.

Exante nominal return of return = It is realted with future happenings. Nominal is the combination of real and inflation, so if the inflation will increase exante will also increase and vice versa.