Ai Lun,a management trainee at a large New York-based bank,is trying to estimate the real rate of return expected by investors.He notes that the 3-month T-bill currently yields 3 percent,and consumer prices have been rising steadily at a 2% rate for several years.What should Ai Lun's estimate of the real rate be?

Question

Quizplus · Accepted Answer

The real rate of return is the nominal rate (which in this case is the 3-month T-bill yield of 3%) minus the inflation rate (which is 2% based on the rising consumer prices). Therefore, the real rate of return would be 1%.

Ai Lun,a Management Trainee at a Large New York-Based Bank,is