Infaltion, Nominal interest rates, and real rates. From 1991 to 2000, th U.S. ec

Question

Infaltion, Nominal interest rates, and real rates. From 1991 to 2000, th U.S. economy had an annual inflation rate of around 3.74%. The historical annual nominal risk-free rate for this same period was around 5.19%. Using the approximate nominal interest rate equation and the true nominal interest rate equation, compute the real interest rate for that decade.

What is th estimated real interest rate using the approximate nominal interest rate equation for that decade ? _____%(round to nearest 2 decimal places)

Explanation / Answer

Approximate real rate = Historic annual nominal risk free rate - Annual inflation rate

Approximate real rate = 5.19% - 3.74% = 1.45%

.

True real rate = (1 + Historic annual nominal risk free rate) / (1 + Annual inflation rate) -1

True real rate = (1 + 5.19%) / (1 + 3.74%) -1 = 1.40%

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