Question

This question is equivalent to three questions. Partial credit is awarded. Select the correct answers from the drop-down menu. Suppose the tax rate on nominal interest income is 20% and does not change over time. Also assume the real interest rate remains constant. In year 1, the inflation rate is 4% and the nominal interest rate is 10%. In year 2, the inflation rate is 14% The real interest rate in both years is [ Select ] The nominal interest rate in year 2 is [ Select ] The after-tax nominal interest rate in year 1 is [ Select ] The after-tax nominal interest rate in year 2 is [ Select ] The after-tax real interest rate in year 1 is [ Select ] The after-tax real interest rate in year 2 is [ Select ]

Answer 1

The real interest rate can be calculated by subtracting the inflation rate from the nominal interest rate. The after-tax nominal interest rate can be found by multiplying the nominal interest rate by (1 - tax rate), and the after-tax real interest rate can be calculated by subtracting the tax rate from the real interest rate

The real interest rate can be calculated by subtracting the inflation rate from the nominal interest rate. In year 1, the inflation rate is 4% and the nominal interest rate is 10%, so the real interest rate is 6%. In year 2, the inflation rate is 14% and the nominal interest rate is unknown.

The after-tax nominal interest rate in year 1 can be found by multiplying the nominal interest rate by (1 - tax rate). If the tax rate is 20%, then the after-tax nominal interest rate in year 1 is 8%. The after-tax nominal interest rate in year 2 is not provided.

The after-tax real interest rate can be calculated by subtracting the tax rate from the real interest rate. In year 1, if the tax rate is 20%, then the after-tax real interest rate is 4%. The after-tax real interest rate in year 2 is not provided.