The closest approximation to the real, risk-free rate of interest is
A) The short-term Treasury bill rate plus the inflation rate.
B) The short-term Treasury bill rate minus the inflation rate.
C) The 10 year Treasury bond rate minus the inflation rate.
D) The 10 year Treasury bond rate minus the 1 year Treasury bill rate.

Question

Quizplus · Accepted Answer

The closest approximation to the real, risk-free rate of interest is the short-term Treasury bill rate minus the inflation rate. This is because the short-term Treasury bill rate is considered to be the closest approximation to the risk-free rate, as it is backed by the full faith and credit of the U.S. government. By subtracting the inflation rate from this, we get the real, risk-free rate of interest, which takes into account the impact of inflation on the purchasing power of money.

The Closest Approximation to the Real, Risk-Free Rate of Interest