Given a nominal interest rate of 5 percent, in which of the following cases woul

Question

Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

a. Inflation is 3 percent; the tax rate is 20 percent.

b. Inflation is 2 percent; the tax rate is 40 percent.

c. Inflation is 1 percent; the tax rate is 60 percent.

d. The after-tax real interest rate is the same for all.

a. Inflation is 3 percent; the tax rate is 20 percent.

b. Inflation is 2 percent; the tax rate is 40 percent.

c. Inflation is 1 percent; the tax rate is 60 percent.

d. The after-tax real interest rate is the same for all.

Explanation / Answer

C. Inflation is 2 percent; the tax rate is 15 percent. Nominal rate=6 percent Inflation is 2 percent; the tax rate is 15 percent. 6=x+2+.15=>x=3.75 in other two cases it is 1.75 and 2.8 respectively

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