Compared with higher inflation rates, a lower inflation rate will (Increase or Decrease?) the after-tax real interest rate when the government taxes nominal interest income. This tends to (Encourage or Discourage?) saving, thereby (Increasing or Decreasing) the quantity of investment in the economy and (Increasing or Decreasing) the economy's long-run growth rate.
Homework Answers
| Inflation rate | Real interest rate | Nominal interest rate | After tax nominal interest rate | After tax real interest rate |
| 2 | 2.5 | 2+2.5 = 4.5 | 4.5-(4.5*0.1) = 4.05 | 4.05-2 = 2.05 |
| 7.5 | 2.5 | 7.5+2.5 = 10 | 10-(10*0.1) = 9 | 9-7.5 = 1.5 |
Blanks-
1) increase
2) encourage
3) increasing
4) increasing
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Compared with higher inflation rates, a lower inflation rate
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