Question

The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest?

1) 8%
2) 8
3) 80%
4) 80

Answer 1

The after-tax real rate of interest, considering a nominal interest rate of 8%, inflation of 1%, and a 10% tax rate, is calculated to be 6.2%.

Step-by-step explanation:

To calculate the after-tax real rate of interest when the nominal interest rate is 8%, inflation is 1%, and the marginal income tax rate is 10%, you would first need to determine the real interest rate by subtracting the inflation rate from the nominal interest rate. This gives us a real interest rate of 7% (8% - 1%). Next, we need to adjust for taxes. Since the income tax is applied on the nominal interest rate, you would calculate the tax on the nominal rate first, which at a 10% tax rate is 0.8% (10% of 8%). Deducting this from the nominal rate gives us an after-tax nominal interest rate of 7.2% (8% - 0.8%). However, to find the after-tax real interest rate, you subtract the inflation rate from this result, leaving us with an after-tax real rate of 6.2% (7.2% - 1%).