Question

4. Inflation and interest rates

The following table shows the average nominal interest rates on six-month Treasury bills between 1997 and 2001, 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 1997 to 2001. (All rates are rounded to the nearest tenth of a percent.)

Year	Nominal Interest Rate	Inflation Rate
	(Percent)	(Percent)
1997	5.2	2.3
1998	4.8	1.5
1999	4.8	2.2
2000	5.9	3.4
2001	3.4	2.8

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 1997 to 2001. Next, use the green points (triangle symbol) to plot the real interest rates for those years.

Nominal Interest RateReal Interest Rate 1996 19971998 1999 2000 2001

1998

1999

2000

2001

Answer 1

Real interest rate = Nominal interest rate - inflation

Year	Nominal interest rate	Inflation rate	Real interest rate
1997	5.2	2.3	2.9
1998	4.8	1.5	3.3
1999	4.8	2.2	2.6
2000	5.9	3.4	2.5
2001	3.4	2.8	0.6

Nominal interest rate Real interest rate 1997 1998 1999 2000 2001