Sam Deposits Money into an Account with a Nominal Interest

question 302

Multiple Choice

Sam deposits money into an account with a nominal interest rate of 4 percent. He expects inflation to be 1.5 percent. His tax rate is 20 percent. Sam's after-tax real rate of interest

• A)will be 2 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
• B)will be 2 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.
• C)will be 1.7 percent if inflation turns out to be 1.5 percent; it will be higher if inflation turns out to be lower than 1.5 percent.
• D)will be 1.7 percent if inflation turns out to be 1.5 percent; it will be lower if inflation turns out to be lower than 1.5 percent.

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Definitions:

Overhead Rate

The ratio used to allocate indirect costs to products or services, based on a specific base such as labor hours or machine hours.

Work In Process Account

A financial account used to track the costs associated with the production of goods that are not yet completed.

Two Stage Production

A production process divided into two distinct phases, each with its set of operations or focus areas, to complete the manufacture of a product or service.

Materials Requisitions

A document or electronic request used to formally request materials needed within an organization.