Question

Suppose the real rate is 2.9 percent and the inflation rate is 4.5 percent. What rate would you expect to see on a Treasury bill? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

using fisher formula: 7.53%

simple-method: 7.4%

Explanation:

the treasury bill will be a risk-free rate.

we will add the inflation premium to the real rate and get the nominal rate of the T-bill:

2.9 free-risk + 4.5 inflation premium =  7.4%

we could also solve using fisher formula for a more precise value:

$\frac{1+r_n}{1+\pi } =1+r_r\\Where:\\r_n = nominal\\r_r = real-rate\\\pi = inflation$

$\frac{1+r_n}{1+0.045 } =1+0.029$

rn = 1.029 x 1.045 -1 = 0.075305‬ = 7.53%