Given a nominal interest rate of 12 percent, in which of the following cases would you earn the highest after-tax real rate of interest?
A)Inflation is 5 percent, and the tax rate is 20 percent.
B)Inflation is 4 percent, and the tax rate is 30 percent.
C)Inflation is 3 percent, and the tax rate is 40 percent.
D)Inflation is 2 percent, and the tax rate is 50 percent.

Question

Quizplus · Accepted Answer

The after-tax real rate of interest is the nominal interest rate minus the inflation rate times (1 - tax rate). In this case, the highest after-tax real rate of interest is earned when the inflation rate is lowest and the tax rate is lowest. This occurs in case A, where the inflation rate is 5 percent and the tax rate is 20 percent.

Given a Nominal Interest Rate of 12 Percent, in Which