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

Question

Quizplus · Accepted Answer

The real after-tax interest rate can be calculated by adjusting the nominal interest rate (real interest rate + inflation rate) for taxes and then subtracting the inflation rate. Here, the nominal interest rate is 3% (real interest rate) + 4% (inflation rate) = 7%. After applying the 50% tax rate, the after-tax nominal interest rate is 3.5% (half of 7%). The real after-tax interest rate is this after-tax nominal rate minus the inflation rate: 3.5% - 4% = -0.5%.

Suppose the Tax Rate on Interest Income Is 50 Percent