Question

question 42 (2 points) if the nominal interest rate offered by local bank is 12%, expectation inflation rate is 3%, and assume the country has 40% tax rate on interest income. how much is the after - tax real interest rate? (hint: enter your answer in 2 decimal places. do not enter the percentage sign. for example 56.67% should be entered as 56.57) your answer:

Explanation:

Step1: Recall the formula for after - tax real interest rate

The formula for the after - tax real interest rate is \(r_{after - tax}=i(1 - t)-\pi\), where \(i\) is the nominal interest rate, \(t\) is the tax rate, and \(\pi\) is the inflation rate.

Step2: Identify the values of \(i\), \(t\), and \(\pi\)

We are given that \(i = 12\%=0.12\), \(t = 40\% = 0.4\), and \(\pi=3\% = 0.03\).

Step3: Calculate the after - tax nominal interest rate

First, calculate the after - tax nominal interest rate: \(i(1 - t)=0.12\times(1 - 0.4)=0.12\times0.6 = 0.072\) or \(7.2\%\).

Step4: Calculate the after - tax real interest rate

Then, use the formula for after - tax real interest rate: \(r_{after - tax}=i(1 - t)-\pi\). Substitute the values: \(r_{after - tax}=0.072-0.03=0.048\) or \(4.80\%\).

Answer:

4.80%