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Part 1

Inflation, nominal interest rates, and real

rates.

From 1991 to 2000, the U.S. economy had an annual inflation rate of around 2.93%. The historical annual nominal risk-free rate for this same period was around 5.02%.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?

What is the true annual real interest rate using the true nominal interest rate equation for that decade?