If Treasury bills are currently paying 5.85 percent and the inflation rate is 2.6 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.)

Given dа ta:

Interest Rate = 5.85 %

Inflation Rate = 2.6 %

Approximate real rate of interest?

Exact real rate of interest?

Answer:

approximate real rate of interest = 3.25%

exact real rate of interest = 3.17%

Explanation:

Nominal Interest Rate:

The normal interest rate that you pay on a loan.

Real Interest Rate:

This is the interest rate after subtracting the inflation rate from the nominal interest rate.

Nominal and Real Interest Rate are related as:

Real Interest Rate = Nominal Interest Rate - Inflation Rate

Note: It is also known as fisher equation

Approximate Real Rate of Interest = 5.85% - 2.6% = 3.25%

Exact Real Rate of Interest = (1 + 0.0585) / (1 + 0.026) = 1.03167 = 3.17%

3.25%

Explanation:

Treasury Bills rate is a nominal rate which is the combination of real rate and Inflation rate.

Use Following formula of real rate.

1 + Real rate = (1 + nominal rate) / (1+inflation rate)

1 + Real rate = (1+5.85%) / (1+2.6%)

1 + Real Rate = 1.0585 / 1.026

Real rate = 1.032 - 1

Real rate = 0.032

real rate = 3.2%