Question

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 (Percent)	Inflation Rate(Percent)
1997	5.2	2.3
1998	4.9	1.6
1999	4.8	2.2
2000	5.9	3.4
2001	3.4	2.8

Source: "Economic Report of the President (2007)," United States Government Printing Office, last modified February 1, 2007, accessed March 11, 2013, http://www.gpo.gov/Tdsys/pkg/ERP-2007/pdt/ERP-2007.pdf 

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.

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

1997  

1998 

1999 

2000 

2001

Answer 1

Real interest rate = Nominal interest rate - Inflation rate

The following table shows the real interest rate schedule -

Year	Nominal Interest Rate (Percent)	Inflation Rate (Percent)	Real Interest Rate (Percent)
1997	5.2	2.3	2.9
1998	4.9	1.6	3.3
1999	4.8	2.2	2.6
2000	5.9	3.4	2.5
2001	3.4	2.8	0.6

Following is the required figure -

The real interest rate was highest in 1998.

So, buyers of six-month Treasury bills receive the highest real return on their investment in 1998.