Question

Suppose that the tax rate is 25% and compute the before-tax real interest rate and the...

Suppose that the tax rate is 25% and compute the before-tax real interest rate and the after-tax real interest rate in the following situations.

a. Nominal interest rate = 9%, inflation is 4%.

b. Nominal interest rate = 8%, inflation is 3%.

c. Nominal interest rate = 7%, inflation is 4%.

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Answer #1

Solution:-

The real interest rate is the difference between the nominal interest rate and inflation rate. The formula for the real interest rate is as given below.

Real Interest Rate=Nominal Interest Rate- Inflation Rate

The tax rate is 25%.

The nominal interest rate after the tax is levied is calculated below.

Nominal Interest Rate After = Nominal Interest Rate Before (1-t)

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