Question

Question 22 

Suppose, that you put $100 in the bank on January 1, 2017. This time around, however, the annual nominal interest rate is 6 percent and the inflation rate is 4 percent. Much to your chagrin, the federal government treats interest income like wages and salaries and you have to pay income tax. Suppose you are in the 25% income tax bracket. 

The real return on your investment, i.e. after you've paid your tax liability is

Now, suppose that the nominal interest rate instead is 12 percent and inflation is 10 percent. In this case, the real after-tax return on your $100 deposit is 

Answer 1

Gol Giver: you put $100 in the bank on January 2017 - The annual nominal interest rate is 6% The Inflation rate is 4% you are in the as% income tax bracket. • The Federal government treats interest income like wages and salaries and you have to pay income tax. ③ we have to find the real return on our investment. is simply the return an investor receives after the rate of inflation is taken into account. After a tax nominal interest rate = 6%*(1-0.25) - 4.52 Alter, tax real interest rate Creturn - Alterrtax nominal Interest rate - Inflation rate = 4.5% -4% 20.5 After real getum in dollars = $ 100 x0.5%. $0.50 - The Nominal interest rate instead is 12% and inflation is 10% . Then real return on your $100 deposit we have to find it now. After-tax meal interest rate = 12 % XI-0.25) - 9. After-tax meal interest rate a After a tan nominal interest rate a inflation rate e 9% -10 = -1 In dollars 2 -$1