Example 5.4 Calculating the Real Interest Rate (1 of 3) Problem - At the start of 2008 , one-year U.S. government bond rates were about 3.3%, while the inflation rate that year was 0.1%. At the start of 2018 , one-year interest rates were about 1.8%, and the inflation rate that year was about 1.9%. What were the real interest rates in 2008 and in 2018? Example 5.4 Calculating the Real Interest Rate (3 of 3 ) Evaluate - Note that the real interest rate was negative in 2018 , indicating that interest rates were insufficient to keep up with inflation: - Investors in U.S. government bonds were able to buy less at the end of the year than they could have purchased at the start of the year. On the other hand, there was hardly any inflation. - Why?? In Problem 5.4, we see real and nominal interest rates for 2008 and 2018. Based on the data shown for 2018 , why were investors able to purchase less U.S. government bonds at the end of the year than at the beginning of the year? Example 5.4 Calculating the Real Interest Rate (2 of 3 ) Solution - Using Eq. 5.5, the real interest rate in 2008 was (1.001)(3.3%0.1%)=3.20%. - In 2018 , the real interest rate was (1.019)(1.8%1.9%)=0.10%