You observe that the current interest rate on short-term U.S. Treasury bills is

Question

You observe that the current interest rate on short-term U.S. Treasury bills is 2.85 percent. You also read in the newspaper that the GDP deflator, which is a common macroeconomic indicator used by market analysts to gauge the inflation rate, currently implies that inflation is 1.2 percent. Given this information, what is the approximate real rate of interest on short-term Treasury bills? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Real rate = [ (1 + .0285 ) /(1+.012 ) ] - 1

              = [1.0285 / 1.012 ] -1

              = 1.01630 -1

             = 1.63%

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