# The table below reports the inflation rate and the annual rate of return on treasury bills in

## Question:

Inflation Rate and Interest Rate for Selected Countries

(a) In the table below, use the formula that your textbook gives for the exact real rate of interest to compute the exact real rates of interest.

(b) What would the nominal rate of return on a bond in Argentina have to be to give a real rate of return of 5% in 1985? ________. What would the nominal rate of return on a bond in Japan have to be to give a real rate of return of 5% in 1985? ________.

(c) Subtracting the inflation rate from the nominal rate of return gives a good approximation to the real rate for countries with a low rate of inflation. For the United States in 1984, the approximation gives you _____ while the more exact method suggested by the text gives you _______. But for countries with very high inflation this is a poor approximation. The approximation gives you _______ for Israel in 1984, while the more exact formula gives you _______. For Argentina in 1985, the approximation would tell us that a bond yielding a nominal rate of _______ would yield a real interest rate of 5%. This contrasts with the answer ________ that you found above.

## Step by Step Answer:

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