If Treasury bills are currently paying 5.75% and the inflation rate is 2.8%, what is the approximate and the exact real rate of interest?

The exact real rate of interest is:

2.95% (5.75% - 2.8%).

Explanation:

The real rate of interest of 2.95% is the interest rate that has been adjusted to remove the effect of inflation of 2.8%.  This implies that the nominal rate is 5.75%.  When inflation rate of 2.8% is removed from the nominal rate, we then obtain the real rate of interest as 2.95%.  It is normally computed as the nominal interest rate minus the expected rate of inflation.

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