Question

Suppose the real rate is 2.1 percent and the inflation rate is 3.4 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

Answer:

5.57%

Explanation:

The real rate is 2.1 percent

The inflation rate is 3.4 percent

To find the rate which is to be expected on a treasury bill we have to apply the fishers equation

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

Therefore, the rate on the treasury bill can be calculated as follows

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

r= 2.1%

= 2.1/100

= 0.021

h= 3.4%

= 3.4/100

= 0.034

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

= (1+0.021)(1+0.034)-1

= (1.021×1.034)-1

= 1.0557-1

= 0.0557×100

= 5.57%

Hence the rate expected on the treasury bill is 5.57%