In Section 3.b of Chapter 8 we learned that the real interest rate is equal to the nominal interest rate minus the rate of inflation. Your friend tells you that interest rates are so low in recent years that you might as well just stuff your money in a can and bury it in the backyard. You want to convince him how one could buy riskless U.S. government securities and still be way ahead of burying money in the backyard. In order to build your argument you want to compute the real interest rate on buying 1-year U.S. Treasury bills in January of 1996 and 1997 that would mature in December of each year.

Check this page to find historical interest rate data for 1-year Treasury bill interest rates. You should also visit this page which provides data on the consumer price index (CPI). Click on these links to find historical interest rate data for 1-year Treasury bill interest rates and consumer price index

Questions

1. First, find the real interest rate on buying a 1?year Treasury bill in January 1999 that matures in December 1999.
2. Find the real interest rate on buying a 1?year Treasury bill in January 2000 that matures in December 2000.
3. If you had buried your money in the backyard, what real rate of interest would you have earned?
4. Given your findings, are you better off burying your money in the backyard when nominal interest rates are low? (Hint: find the rate of inflation by taking the percentage change in the CPI from January 1999 to December 1999 and then from January 2000 to December 2000).