
Phil Dybvig
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Using the approximate equation, we subtract 1% from the
nominal returns of 10%, -20%, and 5%, to obtain real
returns of 9%, -21%, and 4%, respectively. Using the exact
equation, we divide 1 plus the return by 1 plus inflation
and subtract 1. As is usual for computations over short
periods, the approximation works very well. The precision
of the approximation is much better than the precision of
inflation measurement. |
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This completes the solution. Press the large right
triangle to go to the next slide.
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