Answer to Question #66320 in Macroeconomics for Rachel

Question #66320
If the nominal interest rate is 8%, the expected inflation rate is 3%, and the tax rate is 25%, what is the after tax real interest rate when taxes are paid on nominal interest income? The after tax real interest rate when taxes are paid on real interest income?
1
Expert's answer
2017-03-16T12:57:05-0400
If the nominal interest rate is 8%, the expected inflation rate is 3%, and the tax rate is 25%, then the after tax real interest rate when taxes are paid on nominal interest income is 8%*(1 - 0.25) - 3% = 3%.
The after tax real interest rate when taxes are paid on real interest income is (8% - 3%)*(1 - 0.25) = 3.75%.

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