Question

If treasury bills are currently paying 4.6 percent and the inflation rate is 1.9 percent, what are the approximate and the exact real rates of interest?

Answer 1

The approximate real interest rate of a treasury bill with a nominal interest rate of 4.6 percent and an inflation rate of 1.9 percent is 2.7 percent. This calculation is based on the formula: Real Interest Rate = Nominal Interest Rate - Inflation Rate.

Step-by-step explanation:

To calculate the real interest rate, you subtract the rate of inflation from the stated nominal interest rate on the investment, in this case, the treasury bill. Given a nominal interest rate of 4.6 percent and an inflation rate of 1.9 percent, the approximate real interest rate can be found using the formula:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Therefore, the real interest rate is:

Real Interest Rate = 4.6% - 1.9% = 2.7%

This is the approximate real interest rate. For the exact real interest rate, we would need to consider the formula that accounts for the compounding effect of inflation, but with the information given, the approximate real interest rate is sufficient for an estimate.