You expect the annual real rate of interest to remain constant for the indefinite future at...
You expect the annual real rate of interest to remain constant for the indefinite future at 2.2%. You expect the upcoming year’s inflation to be 3%. What current one-year spot rate should you observe in the market? Please use the exact formula.
Enter in percent form without the percentage sign. Enter to three decimal places.
Homework Answers
Current one-year rate = [(1 + Real Rate) * (1 + Inflation Rate)] - 1
= [(1 + 0.022) * (1 + 0.03)] - 1 = 1.05266 - 1 = 0.05266, or 5.266%
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