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tempts Keep the Highest/2 . Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rat wear. 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 ar inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and th interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) (Percent) 4.5 4.5 (Percent) 2.0 9.5 After-Tax Nominal Interest Rate (Percent) After-Tax Real Interes (Percent)

tempts Keep the Highest/2 . Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rat wear. 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 ar inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and th interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) (Percent) 4.5 4.5 (Percent) 2.0 9.5 After-Tax Nominal Interest Rate (Percent) After-Tax Real Interes (Percent)

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Attempts Keep the Highest/2 8. Inflation-induced tax distortions Felix 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 Felix'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 After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 4.5 9.5 Compared with lower inflation rates, a higher inflation rate will decrease the after-tax real interest rate when the government taxes nominal interest income. This tends to discourage saving, thereby decreasing the quantity of investment in the economy and decreasing the economy's long-run growth rate. Grade It Now Save & Continue Continue without saving
Transcribed Image Text:Attempts Keep the Highest/2 8. Inflation-induced tax distortions Felix 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 Felix'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 After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 4.5 9.5 Compared with lower inflation rates, a higher inflation rate will decrease the after-tax real interest rate when the government taxes nominal interest income. This tends to discourage saving, thereby decreasing the quantity of investment in the economy and decreasing the economy's long-run growth rate. Grade It Now Save & Continue Continue without saving
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