Question

suppose the nominal interest rate is 5 percent, the tax rate on interest income is 30 percent, and the after-tax real interest rate is 0.8 percent. what is the inflation rate?

Answer 1

The inflation rate is calculated using the after-tax real interest rate, which equals the nominal interest rate adjusted for taxes, minus the inflation rate. Using the given figures and solving the equation, the inflation rate is determined to be 2.7%.

Step-by-step explanation:

To calculate the inflation rate given the nominal interest rate, the tax rate on interest income, and the after-tax real interest rate, we need to use the formula for the after-tax real interest rate:

After-tax real interest rate = Nominal interest rate * (1 - Tax rate) - Inflation rate

Let's insert the given values: 0.8% = 5% * (1 - 0.30) - Inflation rate

Now, solve for the inflation rate:

0.8% = 3.5% - Inflation rate

Inflation rate = 3.5% - 0.8%

Inflation rate = 2.7%

Therefore, the inflation rate is 2.7%.