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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?

hint

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%

Explanation