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Ben has ​$500 in his savings account and the bank pays an interest rate of 10 percent a year. The inflation rate is 6 percent a year. The government taxes the interest that Ben earns on his deposit at 20 percent. Calculate the nominal​ after-tax interest rate and the real​ after-tax interest rate that Ben earns.

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Answer:

  • Nominal after-tax interest rate = 8%
  • Real After-Tax Interest Rate = 2%

Explanation:

The Nominal rate is 10%

Inflation rate is 6%

And Tax rate is 20%

Nominal after-tax interest rate

= Nominal rate (1 - tax rate)

= 10% ( 1 - 0.2)

= 8%

Real After-Tax Interest Rate

= Nominal after-tax interest rate - inflation rate

= 8% - 6%

= 2%

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