Given a nominal interest rate of 6 percent,in which of the following cases would you earn the highest after-tax real rate of interest?
A)Inflation is 2.5 percent;the tax rate is 25 percent.
B)Inflation is 3 percent;the tax rate is 20 percent.
C)Inflation is 2 percent;the tax rate is 30 percent.
D)The after-tax real interest rate is the same for all of the above.

Question

Quizplus · Accepted Answer

To calculate the after-tax real rate of interest, we need to first calculate the after-tax nominal rate by multiplying the nominal rate with one minus the tax rate (as the tax is paid on the interest earned). 
For example, in option A, the after-tax nominal rate would be 6% x (1-0.25) = 4.5%. 
Next, we need to subtract the inflation rate from the after-tax nominal rate to get the after-tax real rate. 
For option C, the after-tax nominal rate would be 6% x (1-0.30) = 4.2%. 
Subtracting the inflation rate of 2% from 4.2%, we get an after-tax real rate of 2.2%. This is the highest after-tax real rate among the given options.

Given a Nominal Interest Rate of 6 Percent,in Which of the Following