From 1991 to 2000, the U.S. economy had an annual inflation rate of around 2.76%. The historical annual nominal risk-free rate for this same period was around 5.71%. Using the approximate nominal interest rate equation and the true nominal interest rate equation, compute the real interest rate for that decade. What is the estimated real interest rate using the approximate nominal interest rate equation for that decade?

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andromache andromache · Answer 1 · 2020-07-28T04:22:15+02:00

Answer:

2.95% and 2.87%

Explanation:

The computation of the approximate real rate and the estimated real interest rate is shown below:

The Approximate real rate is

= Historic annual nominal risk free rate - Annual inflation rate

= 5.71% - 2.76%

= 2.95%

And, the estimated real interest rate is

= (1 + historical annual nominal risk free rate) ÷ (1 + annual inflation rate) - 1

= (1 + 0.0571) ÷ (1 + 0.0276) - 1

= 2.87%

We simply applied the above formulas so that each one could be determined