An investment offers a total return of 12 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 7 percent. What does Janice believe the inflation rate will be over the next year?

In simple terms 5%

or

According to Fisher formula 4.67%

Explanation:

Nominal rate of return is the inflation adjusted rate of return. Real rate is the rate before inflation. Nominal rate is the sum of real rate and Inflation rate as well.

Simple Method:

Nominal Rate = Real Rate + Inflation Rate

12% = 7% + Inflation Rate

Inflation Rate = 12% - 7%

Inflation Rate = 5%

Using Fisher Effect Formula:

( 1+ n ) = ( 1 + r ) ( 1 + i )

( 1+ 0.12 ) = ( 1 + 0.07 ) ( 1 + i )

1.12 = 1.07 x ( 1 + i )

( 1 + i ) = 1.12 / 1.07

1 + i = 1.467

i = 1.467 - 1

i = 0.467

i = 4.67%

wheres the chart? so i can answer.

you will have $2593.74 in 10 years if you set aside $1,000 at 10%

you will have $9321.91 in 20 years if you set aside $2000 at 8%

you will have $1469.32 in 5 years if you set aside $1000 at 8%

you will have $1296.87 in 10 years if you set aside $500 at 10%

you will have $239.66 in 15 years if you set aside $100 at 6%

you will have $4660.96 in 20 years if you set aside $1000 at 8%