Inflation Quiz 18

A 10% return in a year of 6% inflation is not a 10% gain. Nominal returns flatter; real returns tell you what you can actually buy. This quiz covers the Fisher equation exactly, (1+nominal) = (1+real)(1+inflation), and the quick approximation that simply subtracts one from the other, including when that shortcut is safe and when it misleads. It also works backwards: extracting the inflation the market has priced in, and valuing an index-linked investment. The gap between the exact form and the approximation widens as rates rise. Part of a full finance course. More quizzes and worked examples on the channel.