Question

Assume a nominal interest rate on one-year US Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the US over the next year

Answer 1

2.0488%

Step-by-step explanation:

Fisher Effect Equation = ( 1 + nominal rate ) = ( 1 + inflation rate ) x (1 + real rate)

= ( 1 + 0.046) = ( 1 + inflation rate ) x (1 + 0.025)

( 1 + inflation rate ) = ( 1 + 0.046) / (1 + 0.025)

( 1 + inflation rate ) = 1.020488

Inflation rate = 1.020488 - 1 = 0.020488 = 2.0488%