12. Inflation-induced tax distortions Chris receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% 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 4.5% per year, find the nominal interest rate on Chris's bonds, the after-tax nominal interest rate, and the after-tax rea interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) 3.0 (Percent) 4.5 (Percent) 9.5 4.5 Compared with lower inflation rates, a higher inflation rate will After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) 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

12. Inflation-induced tax distortions Chris receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% 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 4.5% per year, find the nominal interest rate on Chris's bonds, the after-tax nominal interest rate, and the after-tax rea interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) 3.0 (Percent) 4.5 (Percent) 9.5 4.5 Compared with lower inflation rates, a higher inflation rate will After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) 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