Inflation Pass Through through, recently

JonnyKay

I recently found out that there are two formulas for inflation pass through.

When do you use (1/(r+((1-pass through)*infl)) and when do you use the other formula?

maryli

What's the other formula? I only recognize the one you gave for calculating inflation flow through.

kickthatcfa

the one on the mock had it r-inflation + (1-pass thru)*inflation

and it had me stumped because the formula u used didn't get me the right answer. I think it was the last question on the PM

brainsX

ZeroBonus Wrote:
-------------------------------------------------------
> the one on the mock had it r-inflation + (1-pass
> thru)*inflation
>
> and it had me stumped because the formula u used
> didn't get me the right answer. I think it was the
> last question on the PM


the original formula is for real rate, this one just subtracts inflation from nominal rate to get the real rate.

b_sea93

Chuckrox8 Wrote:
-------------------------------------------------------
> Sorry for the confusion. I guess there is only
> one formula.
>
> So if I am given r in real terms i just do
> 1/(r+(1-pass through)*infl))
>
> If given in nominal terms 1/((r-i)+(1-pass
> through)*infl))
>
> Is that right?


i guess..

wizofoz

you got it

SpyAli

Yes, that's correct.

I found the mock question which Zero mentioned, it's question 60 on the 2011 AM mock. In this question they provide the nominal rate of return, so we needed to subtract inflation to get the real rate (as you've shown above).

Cheers

neil1234

Check out ?'s 13 & 14 of reading 38, it's the same formula, but they specify real vs nominal rates for each question. Formula calls for real rate of return to be used, so if they give nominal we have to adjust for inflation. And per mock it looks we should assume nominal unless stated otherwise.



Edited 1 time(s). Last edit at Friday, June 3, 2011 at 06:10PM by jgrandits.

zephyranalyst

Chuckrox8,
Did you finish ethics review? Any points to pay special attention.

eoin

whew..u scared me there...
they are the same lol