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Inflation and Nominal Returns. Suppose the real rate is 3.2 percent a.pdf

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Inflation and Nominal Returns. Suppose the real rate is 3.2 percent and the inflation rate is 4.3 percent. What rate would you expect to see on a Treasury bill? Solution Real rate of interest = 3.2% Inflation rate = 4.3% The relationship between nominal, real interest rates with inflation is Real rate of interest = Nominal rate of interest - Inflation rate Rearranging the equation, Nominal rate of interest = Real rate of interest + Inflation rate Nominal rate of interest = 3.2% + 4.3% = 7.5% Hence we can expect a treasury bill to yield 7.50%.

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Inflation and Nominal Returns. Suppose the real rate is 3.2 percent and the inflation rate is 4.3 percent. What rate would you expect to see on a Treasury bill? Solution Real rate of interest = 3.2% Inflation rate = 4.3% The relationship between nominal, real interest rates with inflation is Real rate of interest = Nominal rate of interest - Inflation rate Rearranging the equation, Nominal rate of interest = Real rate of interest + Inflation rate Nominal rate of interest = 3.2% + 4.3% = 7.5% Hence we can expect a treasury bill to yield 7.50%

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  • 1. Inflation and Nominal Returns. Suppose the real rate is 3.2 percent and the inflation rate is 4.3 percent. What rate would you expect to see on a Treasury bill? Solution Real rate of interest = 3.2% Inflation rate = 4.3% The relationship between nominal, real interest rates with inflation is Real rate of interest = Nominal rate of interest - Inflation rate Rearranging the equation, Nominal rate of interest = Real rate of interest + Inflation rate Nominal rate of interest = 3.2% + 4.3% = 7.5% Hence we can expect a treasury bill to yield 7.50%