Question

CPI in any period $t$ is 142.35 and it is expected to be 157.86 next period. What is the nominal rate of return required to provide the investors with 3% real rate of return? Actual CPI in period (t+1) turned out to be 164.23. What is additional nominal return required to keep the real return fixed at 3%?

Answer 1

Inflation = 157.86- 142.35 / 142.35 = 10.90% (rounded off to two decimal places)

Real Rate = 3%

Nominal Rate = {(1+Real Rate) x (1+ Inflation) }-1

Nominal Rate = (1.03 x 1.1090) -1 = 12.27%

If CPI turned 164.23

Inflation = 164.23- 142.35 / 142.35 = 15.37% (rounded off to two decimal places)

Real Rate = 3%

Nominal Rate = {(1+Real Rate) x (1+ Inflation) }-1

Nominal Rate = (1.03 x 1.1537) -1 = 18.83%

Additional Nominal Rate required = 18.83% - 12.27% = 6.56%

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