Suppose the tax rate on interest income is 50 percent, the real interest rate is 3 percent, and the inflation rate is 4 percent. In this case, the real after -tax interest rate is

Question

Quizplus · Accepted Answer

The nominal interest rate is the real interest rate plus inflation, which is 3% + 4% = 7%. The after-tax nominal interest rate is 7% * (1 - 0.5) = 3.5%. The real after-tax interest rate is the after-tax nominal rate minus inflation, which is 3.5% - 4% = -0.5%.

Suppose the Tax Rate on Interest Income Is 50 Percent