Treasury bills are currently paying 7 percent and the inflation rate is 2.9 percent. What is...

Treasury bills are currently paying 7 percent and the inflation rate is 2.9 percent.

What is the approximate real rate of interest? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Approximate real rate

What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Exact real rate

Solutions

Expert Solution

Question 1:

Approximate Fischer Relation,

Nominal rate = Real rate + Inflation

7% = Real Rate + 2.9%

Real Rate = 4.10%

Question 2:

Actual Fischer Relation,

(1 + Nominal Rate) = (1 + Real Rate) * (1 + Inflation)

(1 + 7%) = (1 + Real Rate) * (1 + 2.9%)

(1 + Real Rate) = 1.0398

Real Rate = 3.98%

jeff jeffy answered 2 years ago

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