Question

Attempts: Keep the Highest: /2 8. Inflation-induced tax distortions Eric receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 2.5% per year, find the nominal interest rate on Eric's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Real Interest Rate (Percent) Nominal Interest Rate (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) Inflation Rate (Percent) 2.0 7.0 2.5 2.5 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to saving, thereby the economy's long-run growth rate. the after-tax real interest rate when the government taxes the quantity of investment in the economy and Grade It Now Save & Continue Continue without saving

Answer 1

Reel in tearst sete = Nyminal interest rate - inflation rete Nomine interest rate - Real interest rate & inflation rate Landar tax numina interrot rate - nominal interest rate (1- tax rate) het redeliterate extrased. inflation rate (...) Real interest rate (ul.) nominal interest sute (1.) After tax Nominal interest rate (1) 4.05 8.55 After tax Real interest rak (0/0) art 2.05 55 2.5 4.5 7 2.5 2.5 9.5 9.5 1.55 - After tax real interest rate - After tox nominal interest rate – inflation, Compared with lower isflahon rates, a higher inflation rate will decrease the after tox real interest rate when the government taxed nominal interest is come. This tends to be curge saving thereby decreasing the grantly of is vestment in the economy and decreasing the eunmy's long own grunth rate. ,