Suppose that in some tax year you earned a nominal interest rate of 6 percent.During the time you held these funds inflation was 1 percent.You compute that you made a real after-tax interest rate of 3 percent.What was your tax rate?
A)40 percent.
B)33.3 percent.
C)25 percent.
D)50 percent.

Question

Quizplus · Accepted Answer

To calculate the real after-tax interest rate, we need to adjust the nominal interest rate by subtracting the inflation rate and the tax rate. Let's start with the formula:
Real after-tax interest rate = (1 + nominal interest rate) / (1 + inflation rate) * (1 - tax rate) - 1

Plugging in the given values, we get:
3% = (1 + 6%) / (1 + 1%) * (1 - tax rate) - 1

Simplifying the equation:
4% = 5% * (1 - tax rate)
1 - tax rate = 4/5
tax rate = 1/5 = 0.2 = 20%

Therefore, the tax rate is 20%, which corresponds to option B.

Suppose That in Some Tax Year You Earned a Nominal