If the nominal interest rate on saving is 12% and the expected inflation rate is 6%, what is the percentage reduction in real interest income resulting from a tax of 25%?
A)25%
B)50%
C)60%
D)100%

Question

Quizplus · Accepted Answer

The real interest rate is the nominal rate minus the inflation rate, which is 12% - 6% = 6%. After a 25% tax on the nominal interest, the after-tax nominal interest rate is 12% * (1 - 0.25) = 9%. The after-tax real interest rate is 9% - 6% = 3%. The reduction in real interest income is (6% - 3%) / 6% = 50%.

If the Nominal Interest Rate on Saving Is 12% and the Expected