Given a nominal interest rate of 10 percent,when would you earn the highest after-tax real interest rate?
A) Inflation is 2 percent,and the tax rate is 50 percent.
B) Inflation is 4 percent,and the tax rate is 40 percent.
C) Inflation is 5 percent,and the tax rate is 30 percent.
D) Inflation is 6 percent,and the tax rate is 20 percent.

Question

Quizplus · Accepted Answer

The after-tax real interest rate is the nominal interest rate minus the inflation rate times (1 - tax rate). The highest after-tax real interest rate is earned when the difference between the nominal interest rate and the inflation rate is the greatest. In this case, the difference is greatest when the inflation rate is 2 percent and the tax rate is 50 percent.

Given a Nominal Interest Rate of 10 Percent,when Would You