Question

The following table shows the average nominal interest rates on six-month Treasury bills between 1971 and 1975, which determined the nominal interest rate that the U.S. government paid when it issued debt in those years. The table also shows the inflation rate for the years 1971 to 1975. (All rates are rounded to the nearest tenth of a percent.)

Year	Nominal Interest Rate	Inflation Rate
	(Percent)	(Percent)
1971	4.5	4.2
1972	4.5	3.3
1973	7.2	6.3
1974	8.0	11.0
1975	6.1	9.1

Source: “FRED Economic Data,” Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org.

On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 1971 to 1975. Next, use the green points (triangle symbol) to plot the real interest rates for those years.

According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?

Nominal Interest Rate Real Interest Rate -1.0 1971 1972 INTEREST RATE (Percent)

1971

1972

1973

1974

1975

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Answer 1

(1) Real rate = Nominal rate - Inflation rate

Data table:

Year	Nominal Rate (%)	Inflation Rate (%)	Real Rate (%)
1971	4.5	4.2	0.3
1972	4.5	3.3	1.2
1973	7.2	6.3	0.9
1974	8	11	-3
1975	6.1	9.1	-3

Graph:

8.0 7.0 Nominal Interest R 6.0 5.0 4.0 Real Interest Ra 3.0 2.0 1.0 -1.0 -2.0 -3.0 1970 1971 1974 1976 1972 1973 1975 YEAR INTEREST RATE (Percent) co

(2) Real return was highest in 1972 (= 1.2%).