Let the nominal rate of interest be 10 percent in the face of expected inflation equaling 6 percent. Suppose further that the price of capital is expected to climb from an index number of 100 at the same pace as the overall price index. Imposing a 20 percent tax on rental income and allowing a 20 percent credit against income tax liability for the purchase of new capital should
A) leave the rental price of capital fixed at 8 percent of the price of capital.
B) leave the rental price of capital fixed regardless of the rate of depreciation.
C) cause the rental price of capital to rise or fall depending on the rate of depreciation.
D) cause the rental price to fall if depreciation is low enough.
E) none of the above.

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The Answer of Let the nominal rate of interest be 10 percent in the face of expected inflation equaling 6 percent. Suppose further that the price of capital is expected to climb from an index number of 100 at the same pace as the overall price index. Imposing a 20 percent tax on rental income and allowing a 20 percent credit against income tax liability for the purchase of new capital should
A) leave the rental price of capital fixed at 8 percent of the price of capital.
B) leave the rental price of capital fixed regardless of the rate of depreciation.
C) cause the rental price of capital to rise or fall depending on the rate of depreciation.
D) cause the rental price to fall if depreciation is low enough.
E) none of the above.

Let the Nominal Rate of Interest Be 10 Percent in the Face