Question

Treasury bills are currently paying 4.7 percent and the inflation rate is 2.2 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. 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.)

Answer 1

Answer:

a.

2.5%

b.

2.45%

Explanation:

The approximate real rate of return can be derived from nominal rate of return formula given below:

nominal rate of return=real rate of return+inflation rate

real rate of return=nominal rate of return-inflation rate

real rate of return= 4.7%-2.2%=2.5%

The exact real rate of return can be derived from exact real rate of return formula given below

real rate of return=(1+nominal rate of return)/(1+inflation rate)-1

real rate of return=(1+4.7%)/(1+2.2%)-1

real rate of return=1.02446184 -1=2.45%