The current 1-year Treasury rate is 10 per cent.It is predicted that the annual inflation rate is going to be 0.50 per cent higher than originally expected.The higher inflation forecasts reflect unexpectedly strong macroeconomic conditions.When the market opens tomorrow,what should the Treasury rate be? (Assume that the real rate of interest is 9.0 per cent.)

Question

Quizplus · Accepted Answer

The real rate of interest is 9.0 per cent. The expected inflation rate is 0.50 per cent higher than originally expected. So, the new expected inflation rate is 10.50 per cent. The nominal interest rate should be 10.50 per cent + 9.0 per cent = 19.50 per cent.

The Current 1-Year Treasury Rate Is 10 Per Cent