Question

Treasury bills are currently paying 5 percent and the inflation rate is 2.5 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. 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.) % -K a. Approximate real rate b. Exact real rate %

Answer 1

Apx.RealRateOfInterest = bill rate - inflation rate

=5%-2.5% = 2.5%

exact RealRate  = (1+bill rate)/(1+inflation rate)-1

=(1+5%)/(1+2.5%)-1

= 0.024 rounded to 2.4%

Answer 2

ANSWER :

Approximate real rate

= Treasury rate - Inflation rate

= 5% - 2.5%

= 2.5% (ANSWER).

Exact real rate 

= (1 +Treasury rate) / (1 + inflation rate) - 1

= (1 + 0.05) / (1 + 0.025) - 1

= 0.0244

= 2.44%  (ANSWER).