If Treasury bills are currently paying 6.3 percent and the inflation rate is 1.7 percent, what is the approximate and the exact real rate of interest?

Question

Social Studies

Dragster

19 January, 12:01

If Treasury bills are currently paying 6.3 percent and the inflation rate is 1.7 percent, what is the approximate and the exact real rate of interest?

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Answers (1)

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Matthew Marks · Answer 1

Given Information:

Nominal Interest Rate = 6.3 %

Inflation Rate = 1.7 %

Required Information:

approximate real rate of interest?

exact real rate of interest?

Answer:

approximate real rate of interest = 4.6%

exact real rate of interest = 4.5%

Explanation:

Nominal Interest Rate: The interest rate that a person earn or pay on a loan.

Real Interest Rate: The nominal interest rate after adjusting for inflation.

Relation between Nominal and Real Interest Rate: The fisher equation

Real Interest Rate = Nominal Interest Rate - Inflation Rate

approximate real rate of interest = 6.3% - 1.7% = 4.6%

exact real rate of interest = (1 + 0.063) / (1 + 0.017) = 1.045 = 4.5%