Tara Deposits Money into an Account with a Nominal Interest

question 67

Multiple Choice

Tara deposits money into an account with a nominal interest rate of 6 percent.She expects inflation to be 2 percent.Her tax rate is 20 percent.Tara's after-tax real rate of interest

• A)will be 2.8 percent if inflation turns out to be 2 percent;it will be higher if inflation turns out to be higher than 2 percent.
• B)will be 2.8 percent if inflation turns out to be 2 percent;it will be lower if inflation turns out to be higher than 2 percent.
• C)will be 3.2 percent if inflation turns out to be 2 percent;it will be higher if inflation turns out to be higher than 2 percent.
• D)will be 3.2 percent if inflation turns out to be 2 percent;it will be lower if inflation turns out to be higher than 2 percent.

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Definitions:

Shortage

A situation where the demand for a product or service exceeds its supply in a market, often leading to rising prices.

Equilibrium Quantity

The quantity of goods or services supplied that is exactly equal to the quantity demanded at the market price.

Supply Increases

A situation where the quantity of a good or service that producers are willing and able to sell at a specific price rises.

Equilibrium Price

The price at which the quantity of a good or service demanded by consumers equals the quantity supplied by producers, resulting in market stability.