Suppose the real rate is 325 percent and the inflation rate

Suppose the real rate is 3.25 percent and the inflation rate is 2.5 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.)

Rate             %

Solution

Calculation of rate of Treasury bill:

As per Fisher equation,

(1+ nominal rate)= (1+ real rate)*(1+ inflation rate)

(1+nominal rate)= (1+0.0325)*(1+0.025)

1+ nominal rate= 1.058313

Nominal rate= 1.058313-1= 0.058313

Therefore rate on treasury bill is 5.83%