Given a nominal interest rate of 5 percent,in which of the following cases would you earn the highest after-tax real rate of interest?
A)Inflation is 3 percent;the tax rate is 15 percent.
B)Inflation is 2 percent;the tax rate is 40 percent.
C)Inflation is 1 percent;the tax rate is 50 percent.
D)The after-tax real interest rate is the same for all of the above.

Question

Quizplus · Accepted Answer

The after-tax real interest rate is calculated as (1 - tax rate) x (nominal interest rate - inflation rate). Therefore, in option A, the after-tax real interest rate would be 1 - 0.15 = 0.85 x (0.05 - 0.03) = 0.0017 or 0.17%. In option B, it would be 1 - 0.40 = 0.6 x (0.05 - 0.02) = 0.018 or 1.8%. In option C, it would be 1 - 0.50 = 0.5 x (0.05 - 0.01) = 0.02 or 2%. Thus, option C would earn the highest after-tax real rate of interest.

Given a Nominal Interest Rate of 5 Percent,in Which of the Following