Suppose the real rate is 3.40 percent and the inflation rate is 2.2 percent.

Suppose the real rate is 3.40 percent and the inflation rate is 2.2 percent.

Required:

What rate would you expect to see on a Treasury bill? (Do not include the percent sign (%). Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Rate

%

Explanation:

The Fisher equation, which shows the exact relationship between nominal interest rates, real interest rates, and inflation, is:

(1 + R) = (1 + r)(1 + h)

R = (1 + 0.0340)(1 + 0.022) – 1

R = 0.0567 or 5.67%