Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real interest rate?
A) Inflation is 1 percent, and the tax rate is 10 percent.
B) Inflation is 2 percent, and the tax rate is 15 percent.
C) Inflation is 3 percent, and the tax rate is 20 percent.
D) Inflation is 4 percent, and the tax rate is 25 percent.

Question

Quizplus · Accepted Answer

The after-tax real interest rate is calculated as (1 - tax rate) x (1 + nominal interest rate) / (1 + inflation rate) - 1. Plugging in the numbers for each option, we get:
A) (1 - 0.1) x (1 + 0.06) / (1 + 0.01) - 1 = 4.86%
B) (1 - 0.15) x (1 + 0.06) / (1 + 0.02) - 1 = 3.64%
C) (1 - 0.2) x (1 + 0.06) / (1 + 0.03) - 1 = 2.23%
D) (1 - 0.25) x (1 + 0.06) / (1 + 0.04) - 1 = 0.75%
Therefore, option D gives the lowest after-tax real interest rate.

Given a Nominal Interest Rate of 6 Percent, in Which