If the nominal interest rate on saving is 5% and the expected inflation rate is 2%, what is the after-tax return on saving if the tax rate is 25%?
A)1.75%
B)2.25%
C)3%
D)5.75%

Question

Quizplus · Accepted Answer

The real interest rate can be calculated as the nominal interest rate minus the inflation rate, which is 5% - 2% = 3%. Then, to find the after-tax return, we apply the tax rate to the real interest rate: 3% * (1 - 25%) = 3% * 0.75 = 2.25%. However, since the tax is applied to the nominal interest rate before adjusting for inflation, the correct calculation should be: (5% * (1 - 25%)) - 2% = (5% * 0.75) - 2% = 3.75% - 2% = 1.75%.

If the Nominal Interest Rate on Saving Is 5% and the Expected