Question

question 11
2 pts
the tax code taxes nominal interest as income. given a nominal interest rate of 29%, your tax rate is 19%, and inflation is 2. what is your after - tax real rate of interest? answer in % points rounded to two decimal places. e.g. if you calculated 0.025678 or 2.5678% then input 2.57.

Explanation:

Step1: Calculate after-tax nominal rate

First, find the after-tax nominal interest rate by subtracting the tax portion from the nominal rate.
$\text{After-tax nominal rate} = 29\% \times (1 - 19\%) = 0.29 \times 0.81 = 0.2349$ or 23.49%

Step2: Apply Fisher Equation

Use the Fisher Equation to find the real interest rate: $r = \frac{1 + i}{1 + \pi} - 1$, where $i$ is the after-tax nominal rate, $\pi$ is inflation.
$r = \frac{1 + 0.2349}{1 + 0.02} - 1 = \frac{1.2349}{1.02} - 1 \approx 1.2107 - 1 = 0.2107$

Step3: Convert to percentage and round

Multiply the decimal result by 100 and round to two decimal places.
$0.2107 \times 100 = 21.07\%$

Answer:

21.07