Question

From 1991 to​ 2000, the U.S. economy had an annual inflation rate of around 2.76​%. The historical annual nominal​ risk-free rate for this same period was around 5.71​%. Using the approximate nominal interest rate equation and the true nominal interest rate​ equation, compute the real interest rate for that decade. What is the estimated real interest rate using the approximate nominal interest rate equation for that​ decade?

Answer 1

2.95% and 2.87%

Step-by-step explanation:

The computation of the approximate real rate and the estimated real interest rate is shown below:

The Approximate real rate is

= Historic annual nominal risk free rate - Annual inflation rate

= 5.71% - 2.76%

= 2.95%

And, the estimated real interest rate is

= (1 + historical annual nominal risk free rate) ÷ (1 + annual inflation rate) - 1

= (1 + 0.0571) ÷ (1 + 0.0276) - 1

= 2.87%

We simply applied the above formulas so that each one could be determined