Question

You put money into an account and earn an after-tax real interest rate of 4 percent....

You put money into an account and earn an after-tax real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your nominal before-tax real rate of interest?

4.0 percent.

6.5 percent.

1.5 percent.

8.0 percent.
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Answer #2

After tax real interest rate = Nominal interest rate after tax - inflation rate.

=> 4% = Nominal interest rate after tax - 2%

=> Nominal interest rate after tax = 4% + 2%

=> Nominal interest rate after tax = 6%

Nominal interest rate after tax = Nominal interest rate before tax (1 - Tax rate)

=> 6% = Nominal interest rate before tax (1 - 0.25)

=> 6% = Nominal interest rate before tax (0.75)

=> Nominal interest rate before tax = (6% / 0.75)

=> Nominal interest rate before tax = 8%

Answer: Option (D)

answered by: anonymous
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