Assume an economy begins with zero inflation, a 25 percent income tax rate, and a real interest rate of 4 percent.If inflation rises to 4 percent, the nominal interest rate becomes ________ percent and the after-tax real interest becomes ________ percent.

Question

Quizplus · Accepted Answer

The nominal interest rate is the sum of the real interest rate and inflation, so it becomes 8%. The after-tax real interest rate is calculated by adjusting the nominal rate for taxes and inflation, resulting in 2%.

Assume an Economy Begins with Zero Inflation, a 25 Percent