Question

If Treasury bills are currently paying 6.15 percent and the inflation rate is 2 percent, what is the approximate and the exact real rate of interest? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Approximate real rate % Exact real rate %

Answer 1

Answer and explanation

Treasure bill = 6.15%

Inflation rate = 2%

From the approximate Fisher equation, Real interest rate = nominal interest rate – rate of inflation

=6.15%–2.0%=4.15%

The exact Fisher equation is therefore= 1.0615/1.02 = 1.0406 or 4.06%