Given a Nominal Interest Rate of 8 Percent, in Which

question 215

Multiple Choice

Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?

• A)Inflation is 5 percent; the tax rate is 20 percent.
• B)Inflation is 4 percent; the tax rate is 30 percent.
• C)Inflation is 3 percent; the tax rate is 40 percent.
• D)The after-tax real interest rate is the same for all of the above.

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Definitions:

Clinton

Refers to William Jefferson "Bill" Clinton, the 42nd President of the United States (1993–2001), known for his economic policies and being the second president to be impeached.

Compounded Monthly

Interest on an investment is calculated monthly and added to the principal sum, affecting future interest calculations.

Annual Rate

The interest rate for a period of one year, used to compare the yield of different financial products or investments.

Discount Rate

The interest rate charged to commercial banks and other financial institutions for the loans they take from the central bank's discount window, also a factor in present value calculations.