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QUESTION:
he following table gives the average nominal interest rates on six-month Treasury bills spanning the years 2004 and 2008, which determined the nominal interest rate paid by the U.S. government when it issued debt in that time period. The table also gives the inflation rate for the years 2004 to 2008. (All rates rounded to the nearest 0.1 percent.)
YearNominal Interest RateInflation Rate
(Percent)(Percent)
20041.62.7
20053.43.4
20064.83.2
20074.42.9
20081.63.8
Source: “FRED Economic Data,” Federal Reserve Bank of St. Louis, last modified September 23, 2019, accessed September 24, 2019, https://fred.stlouisfed.org.
On the following graph, use the orange points (square symbol) to plot the nominal interest rates for the years 2004 to 2008. Next, use the green points (triangle symbol) to plot the real interest rates for those years.
According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?

ANSWER:

The real interest rate equals the nominal interest rate minus the inflation rate. For example, the real interest rate in 2004 was 1.6%−2.7%=−1.1%. You can compute the remaining values in a similar way:
YearNominal Interest RateInflation RateReal Interest Rate
(Percent)(Percent)(Percent)
20041.62.71.6−2.7=−1.1
20053.43.43.4−3.4=0
20064.83.24.8−3.2=1.6
20074.42.94.4−2.9=1.5
20081.63.81.6−3.8=−2.2
According to the table, in which year did buyers of six-month Treasury bills receive the highest real return on their investment?
Correct

Points:
1 / 1
Close Explanation
Explanation:
In 2006, six-month Treasury bills paid a nominal interest rate of 4.8%, but prices rose 3.2% during the year. In other words, inflation reduced the return on the Treasury bills by 3.2%. Therefore, the real return on the six-month Treasury bills was 1.6% (that is, 4.8%−3.2%). In no other year was the real return greater than 1.6%.

Posted by Cleveland on September 9, 2024
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