Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U.S. over the next year?

Question

Quizplus · Accepted Answer

The Fisher Effect Equation is: (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Solving for the inflation rate: (1 + 0.038) = (1 + 0.02) * (1 + inflation rate), which gives an inflation rate of approximately 1.76%.

Assume a Nominal Interest Rate on One-Year U