Assume a nominal interest rate on one-year U.S. Treasury Bills of 2.60% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

Question

Quizplus · Accepted Answer

The Fisher Effect Equation is: nominal interest rate ≈ real interest rate + expected inflation rate. Therefore, 2.60% ≈ 1.00% + expected inflation rate, which gives an expected inflation rate of approximately 1.60%.

Assume a Nominal Interest Rate on One-Year U