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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?
Expert's answer
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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