Question

you put money into an account and earn a real interest rate of 4 percent. inflation is 2 percent, and your marginal tax rate is 25 percent. what is your after-tax real rate of interest? group of answer choices 1.5% 2.5% 5% 4.5%

Answer 1

The after-tax real rate of interest is 1.5%.

Step-by-step explanation:

The after-tax real rate of interest can be found by subtracting the effect of taxes and inflation from the nominal rate.

In this case, the nominal rate is 4 percent, inflation is 2 percent, and the marginal tax rate is 25 percent.

To calculate the after-tax real rate of interest, first subtract the inflation rate from the nominal rate

(4% - 2% = 2%).

Then, multiply this result by (1 - tax rate) to account for taxes

(2% * (1 - 0.25) = 1.5%).

Therefore, the after-tax real rate of interest is 1.5%.