Assume That the Nominal Rate of Interest Is 10% and the Inflation

question 24

Multiple Choice

Assume that the nominal rate of interest is 10% and the inflation rate is 10%.The tax rate on interest from savings is 25%; in the first period Wes has $100 in savings.Which of the following statements is TRUE?

• A) The real after-tax rate of interest Wes earns is negative.
• B) Wes's savings will have more buying power in the second period than they had in the first.
• C) The real after-tax rate of interest Wes earns is zero.
• D) Wes will not have to pay taxes on interest since his real rate of interest was zero.

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