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.**Scenario Table:**| Inflation Rate (Percent) | Real Interest Rate (Percent) | Nominal Interest Rate (Percent) | After-Tax Nominal Interest Rate (Percent) | After-Tax Real Interest Rate (Percent) ||--------------------------|------------------------------|---------------------------------|------------------------------------------|----------------------------------------|| 3.0 | 4.5 | | | || 9.5 | 4.5 | | | |**Task:**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 real interest rate under each inflation scenario.**Additional Explanation:**Compared with lower inflation rates, a **higher inflation rate** will ______ the after-tax real interest rate when the government taxes nominal interest income. This tends to ______ saving, thereby ______ the quantity of investment in the economy and ______ the economy’s long-run growth rate. (Blanks can be filled with relevant insights based on the data analysis.)

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 real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 3.0 4.5 9.5 4.5 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to saving, thereby After-Tax Real Interest Rate (Percent) the after-tax real interest rate when the government taxes the quantity of investment in the economy and

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 real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 3.0 4.5 9.5 4.5 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to saving, thereby After-Tax Real Interest Rate (Percent) the after-tax real interest rate when the government taxes the quantity of investment in the economy and

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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