If You Expect Inflation to Be 3 Percent Next Year

question 14

Multiple Choice

If you expect inflation to be 3 percent next year and you buy a one-year bond paying 4 percent interest, what is your after-tax expected real interest rate if you face a tax rate of 30 percent?

• A)−0.2 percent
• B)0.0 percent
• C)0.3 percent
• D)1.0 percent

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Definitions:

Market Price

The present cost at which a product or service is available for purchase or sale in the marketplace.

Net Marginal Revenue

The difference between the marginal revenue earned from selling an additional unit of a product or service and the marginal cost of producing that unit.

Wool Fabric

A textile material made from the natural fibers of sheep, known for its warmth, resilience, and ability to absorb moisture without feeling wet.

Marginal Cost

The upswing in total financial outlay required for the production of one more unit of a good or service.