Assume that the nominal rate of interest is 10% and the inflation rate is 10%.The tax rate on interest from savings is 25%; in the first period Wes has $100 in savings.Which of the following statements is TRUE?

Question

Quizplus · Accepted Answer

The real after-tax rate of interest is the nominal rate of interest minus the inflation rate minus the tax rate on interest. In this case, the real after-tax rate of interest is 10% - 10% - 25% = -25%. This means that Wes is losing purchasing power over time, and his savings are worth less in real terms. Therefore, option A is the correct answer. Option B is false since inflation is higher than the nominal interest rate, and option C is false because the real after-tax rate of interest is negative. Option D is also false because Wes still has to pay taxes on interest earned even though the real after-tax rate of interest is negative.

Assume That the Nominal Rate of Interest Is 10% and the Inflation