Treasury bills are currently paying 7 percent and the inflation rate is 2.9 percent. |
What is the approximate real rate of interest? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Approximate real rate | % |
What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Exact real rate | % |
Question 1:
Approximate Fischer Relation,
Nominal rate = Real rate + Inflation
7% = Real Rate + 2.9%
Real Rate = 4.10%
Question 2:
Actual Fischer Relation,
(1 + Nominal Rate) = (1 + Real Rate) * (1 + Inflation)
(1 + 7%) = (1 + Real Rate) * (1 + 2.9%)
(1 + Real Rate) = 1.0398
Real Rate = 3.98%
ANSWER :
Approximate real rate
= Treasury rate - Inflation rate
= 7% - 2.9%
= 4.1% (ANSWER).
Exact real rate
= (1 +Treasury rate) / (1 + inflation rate) - 1
= (1 + 0.07) / (1 + 0.029) - 1
= 0.0398
= 3.98% (ANSWER).
Treasury bills are currently paying 7 percent and the inflation rate is 2.9 percent. What is...