Question

Assume a nominal interest rate on one-year U.S. Treasury Bills of 2.60% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

Answer 1

Answer:

1.58%

Explanation:

Fisher equation:

(1 + nominal interest rate) = (1 + real interest rate) x (1 + expected rate of inflation)

1.026 = 1.01 x (1+expected rate of inflation_)

--> Expected rate of inflation = 1.58%