Treasury bills are currently paying 9 percent and the inflation rate is 3.6 percent.
a. What is the approximate real rate of interest?
b. What is the exact real rate?
a. Approximate real rate _______ %
b. Exact real rate _______ %
Homework Answers
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ANSWER
a.
Approximate real rate
= Treasury rate - Inflation rate
= 9% - 3.6%
= 5.4% (ANSWER).
b.
Exact real rate
= (1 +Treasury rate) / (1 + inflation rate) - 1
= (1 + 0.09) / (1 + 0.036) - 1
= 0.0521
= 5.21% (ANSWER).
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