Question

Assume a nominal interest rate on one-year U.S. Treasury Bills of 1.60% and a real rate of interest of 3.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year

Answer 1

inflation rate= -0.014 = -1.4%

Step-by-step explanation:

Giving the following information:

Nominal interest rate= 1.6 %

Real interest rate= 3%

To calculate the inflation rate, we need to use the following formula:

Real interest rate= nominal interest rate - inflation rate

inflation rate= nominal interest rate - Real interest rate

inflation rate= 0.016 - 0.03

inflation rate= -0.014 = -1.4%

In this period the general cost of products decreased 1.4%