You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Question

Quizplus · Accepted Answer

The after-tax real rate of interest formula is: 
After-tax real rate of interest = (1 + nominal interest rate) x (1 - marginal tax rate) / (1 + inflation rate) - 1

Plugging in the numbers, we get:
After-tax real rate of interest = (1 + 0.04) x (1 - 0.20) / (1 + 0.02) - 1
After-tax real rate of interest = 0.032 or 3.2%

Therefore, the correct answer is B, 2.8 percent (rounded to the nearest tenth).

You Put Money into an Account and Earn a Real