Let’s see just how much high expected inflation can hurt incentives to save for the long run. Let’s assume the government takes about one‑third of every extra dollar of nominal interest you earn. You must pay taxes on nominal interest. However, if you are rational, you will care mostly about your real, after‑tax interest rate when deciding how much to save.?i??=?Eπ=π23×?23×i(23×?)−?(23×i)−πNominal interest rateInflation (no surprises)Nominal after‑tax returnReal after‑tax return15%12%10%-2%6%3% 12%9% 90%87% 900%897% Calculate the nominal and real after‑tax return for each case.Nominal interest rate = 6%, inflation = 3%Nominal after‑tax return: %Real after‑tax return: %Nominal interest rate = 12%, inflation = 9%Nominal after‑tax return: %Real after‑tax return: %Nominal interest rate = 90%, inflation = 87%Nominal after‑tax return: %Real after‑tax return: %Nominal interest rate = 900%, inflation = 897%Nominal after‑tax return: %Real after‑tax return: %

The difference between the real interest rate and the nominal interest rate is that the real…

Answered: Let’s see just how much high expected…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Let’s see just how much high expected inflation can hurt incentives to save for the long run. Let’s assume the government takes about one‑third of every extra dollar of nominal interest you earn. You must pay taxes on nominal interest. However, if you are rational, you will care mostly about your real, after‑tax interest rate when deciding how much to save.

?i	??=?Eπ=π	23×?23×i	(23×?)−?(23×i)−π
Nominal interest rate	Inflation (no surprises)	Nominal after‑tax return	Real after‑tax return
15%	12%	10%	-2%
6%	3%
12%	9%
90%	87%
900%	897%

Calculate the nominal and real after‑tax return for each case.

Nominal interest rate = 6%, inflation = 3%

Nominal after‑tax return:

Real after‑tax return:

Nominal interest rate = 12%, inflation = 9%

Nominal after‑tax return:

Real after‑tax return:

Nominal interest rate = 90%, inflation = 87%

Nominal after‑tax return:

Real after‑tax return:

Nominal interest rate = 900%, inflation = 897%

Nominal after‑tax return:

Real after‑tax return:

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