In 1999,the nominal interest rate on a 30-year bond was around 5.85 percent.Assuming that investors have set these contracts expecting a real interest rate of 3 percent,what is the average rate of inflation that investors in the market are expecting over the next thirty years?
A)2.85 percent
B)3 percent
C)5.85 percent
D)8.85 percent

Question

Quizplus · Accepted Answer

We can use the Fisher equation to solve for the expected inflation rate:
Nominal Interest Rate = Real Interest Rate + Inflation Rate
5.85% = 3% + Inflation Rate
Inflation Rate = 5.85% - 3% = 2.85%
Therefore, investors in the market are expecting an average rate of inflation of 2.85% over the next thirty years.

In 1999,the Nominal Interest Rate on a 30-Year Bond Was