Question

11. Inflation and Nominal Returns Suppose the real rate is 2.25 percent and the inflation rate is 3.2 percent. What rate would you expect to see on a Treasury bill?

Answer 1

Based on Fischer Relation,

(1 + Nominal Rate) = (1 + Real rate) * (1 + Inflation)

(1 + Nominal Rate) = (1 + 2.25%) * (1 + 3.2%)

(1 + Nominal Rate) = (102.25%) * (103.2%) = 1.05522

Nominal rate = 0.05522

Nominal rate = 5.52%

Answer 2

ANSWER :

Rate on treasury bill 

= (1 + R)(1 +I) - 1 

= (1 + 0.0225)(1 + 0.032) - 1

= 0.0552

= 5.52%  (ANSWER).