Question

Suppose the real rate is 3.6 percent and the inflation rate is 5.2 percent. What rate would you expect to see on a Treasury bill? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

The relationship among the nominal rate (here, T-bill rate) , real rate & inflation rate can be expressed as per the below equation:

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

it gives,

1 + nominal rate = (1+ real rate) * ( 1+ infaltion rate)

it gives, Nominal rate = (1+ real rate) * (1+ inflation) - 1

So, we will now put the values of real and inflation rates into the above equation,

Nominal rate = ( 1+ 0.036) * (1+ 0.052) -1

= (1.036) * (1.052) -1

= 1.089872 -1

= 0.089872

= 8.98 %