Tara deposits money into an account with a nominal interest rate of 6 percent.She expects inflation to be 2 percent.Her tax rate is 20 percent.Tara's after-tax real rate of interest
A)will be 2.8 percent if inflation turns out to be 2 percent;it will be higher if inflation turns out to be higher than 2 percent.
B)will be 2.8 percent if inflation turns out to be 2 percent;it will be lower if inflation turns out to be higher than 2 percent.
C)will be 3.2 percent if inflation turns out to be 2 percent;it will be higher if inflation turns out to be higher than 2 percent.
D)will be 3.2 percent if inflation turns out to be 2 percent;it will be lower if inflation turns out to be higher than 2 percent.

Question

Quizplus · Accepted Answer

The after-tax nominal interest rate is 6% * (1 - 0.20) = 4.8%. The after-tax real interest rate is 4.8% - 2% = 2.8%. If inflation is higher than 2%, the real rate will be lower.

Tara Deposits Money into an Account with a Nominal Interest