Sam deposits money into an account with a nominal interest rate of 4 percent.He expects inflation to be 1.5 percent.His tax rate is 32 percent.Sam's after-tax real rate of interest
A)will be 1.2 percent if inflation turns out to be 1.5 percent;it will be higher if inflation turns out to be lower than 1.5 percent.
B)will be 1.2 percent if inflation turns out to be 1.5 percent;it will be lower if inflation turns out to be lower than 1.5 percent.
C)will be 1.7 percent if inflation turns out to be 1.5 percent;it will be higher if inflation turns out to be lower than 1.5 percent.
D)will be 1.7 percent if inflation turns out to be 1.5 percent;it will be lower if inflation turns out to be lower than 1.5 percent.

Question

Quizplus · Accepted Answer

The after-tax nominal interest rate is 4% * (1 - 0.32) = 2.72%. The after-tax real interest rate is 2.72% - 1.5% = 1.22%, approximately 1.2%. If inflation is lower than 1.5%, the real rate will be higher.

Sam Deposits Money into an Account with a Nominal Interest