Suppose the real rate is 3.75 percent and the inflation rate is 1.5 percent. What rate would you expect to see on a Treasury bill?

To find the nominal interest rate (the rate expected on a Treasury bill), you can use the **Fisher equation**:

\[
(1 + i) = (1 + r)(1 + \pi)
\]

Where:
- \( i \) is the nominal interest rate (the rate you expect to see on the Treasury bill),
- \( r \) is the real interest rate (3.75% or 0.0375),
- \( \pi \) is the inflation rate (1.5% or 0.015).

Let's calculate \( i \):

\[
1 + i = (1 + 0.0375)(1 + 0.015)
\]

\[
1 + i = (1.0375)(1.015) = 1.05306
\]

\[
i = 1.05306 - 1 = 0.05306
\]

Converting this to a percentage:

\[
i = 5.31\%
\]

So, the nominal interest rate you would expect to see on the Treasury bill is **5.31%**.

Would you like further details or have any questions?

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Here are some related questions:
1. How does the Fisher equation relate real and nominal interest rates?
2. How would the Treasury bill rate change if inflation were higher?
3. What assumptions does the Fisher equation rely on?
4. Can nominal interest rates be negative?
5. How do inflation expectations impact bond prices?

**Tip**: Always adjust for inflation when comparing returns over time, as real interest rates account for the eroding effect of inflation on purchasing power.

Learn how to calculate the nominal interest rate on a Treasury bill using the Fisher equation, with a real interest rate of 3.75% and inflation at 1.5%. This step-by-step guide covers interest rate formulas, inflation adjustments, and the Fisher equation, ideal for high school seniors and college students.

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