One-year Treasury bill rates in 20XX averaged 5.15% and inflation for the year was 7.3%. If investors had expected the same inflation rate as that realized, calculate the real interest rate for 20XX according to the Fisher effect.

Question

Quizplus · Accepted Answer

The real interest rate is calculated using the Fisher effect:
Real Interest Rate = Nominal Interest Rate - Inflation Rate

Nominal interest rate is given as the average one-year Treasury bill rate which was 5.15%. Inflation rate is given as 7.3%. Using the Fisher effect, we get:
Real Interest Rate = 5.15% - 7.3% = -2.15%

Therefore, the correct choice is B.

One-Year Treasury Bill Rates in 20XX Averaged 5