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Calculating Real rates of return: If treasury bills are currently paying 6 percent and the inflation rate is 2.8 percent, what is the approximate real rate of interest? The exact real rate?

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The approximate relationship between nominal interest rates (R), real interest rates (r) and inflation (h) is
R = r + H
Approximate r = .06-.28
Approximate r = .032 or 3.20%

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation is:
(1+R) = (1+r)(1+h)
(1+.06)=(1+r)(1+.028)
Exact r = [(1+.06)/(1+.028)]-1
Exact r = .0311 or 3.11%

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