Question

Jane notes that suppose you invest $10,000 in a savings account which gives you 20% interest. If inflation is 15% and tax on earned interest is 20% then

Select one:

a. Real interest rate = 5% & tax =$400

b. Real interest rate = 2% & tax =$400

c. Real interest rate = 5% & tax =$300

d. None of the above

Answer 1

option a

Real interest rate = 5% & tax =$400

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interest amount on the investment =invesmtnet *interest on the saving account

=10000*0.2

=2000

tax on the amount =tax*tax rate

=2000*0.2

=$400

real interest rate =interest ion the saving account -inflation

=20-15

=5%

nominal interest rate after tax =((interest amount -tax amount)/investment)*100

=((2000-400)/10000)*100

=16%

real interest rate after tax =ominal interest rate after tax -inflation

=16-15

=1%