Question

Suppose the real rate is 1.9%, and the inflation rate is 3.1%. what nominal rate would you expect to see on a treasury bill?

Answer 1

Using the Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is:

The solution would be:

(1 +R) = (1 +r)(1 +h)

R= (1 + .031)(1 + .019) – 1

= (1.031)(1.019) – 1

= 1.050589 – 1

=0.050589 or 5.059%