Question

Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent, the inflation rate is 2 percent, and the tax on interest income is 20%, you will be able to buy ________ worth of goods on January 1, 2018, valued at 2017’s prices.

Answer 1

$102.40

Step-by-step explanation:

With an annual nominal interest rate at 5 percent, and an inflation rate at 2 percent, the actual interest rate is 3 percent.

The after tax interest income is given by:

`I = 100*0.03*(1-0.2)\\I=\$ 2.40`

The final amount valued at 2017's prices is given by the sum of the initial investment to the actual interest income after taxes (I) :

`V = \$100 +\$2.40\\V= \$102.40`

You will be able to buy $102.40 worth of goods on January 1, 2018, valued at 2017’s prices.