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lilacrabbit506Lv1

28 Sep 2019

3. Suppose that a typical taxpayer has a marginal personal income tax rate of 20 percent. The nominal interest rate is 4 percent, and the expected inflation rate is 1 percent.

a. What is the real after-tax rate of interest?

b. Suppose that the expected inflation rate increases by 2 percentage points to 3 percent, and the nominal interest rate increases by the same amount. What happens to the real aftertax rate of return?

c. If the inflation rate increases as in part b, by how much would the nominal interest rate have to increase to keep the real after-tax interest rate at the same level as in part a? Can you generalize your answer using an algebraic formula?

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Darryn D'SouzaLv10

28 Sep 2019

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Related questions

1. Nominal and real interest rates:

a. Explain the difference between real and nominal interest rates.

b. Which of these two interest rates is relevant for investment and consumption decisions and why?

c. How is the real interest rate calculated ex-post? How is the real interest rate calculated ex-ante?

2. Fisher parity

a. Write down the approximation formula of the Fisher parity.

b. What is the real interest rate if the nominal interest rate is 6% and the expected inflation rate is 1%?

c. How is the real interest rate affected if the expected inflation increases while the nominal interest rate remains constant?

d. Given that the nominal interest rate can’t be negative ("zero lower bound"), what is the lowest value the real interest rate can be?

jadegerbil233

Suppose expected inflation was 2% and actual inflation was 4%. Then the ex post real interest rate was ---- than the ex ante real interest rate and there was a redistribution of wealth from ----.

a higher; borrowers to lenders

b higher; lenders to borrowers

c lower; borrowers to lenders

d lower; lenders to borrowers

Suppose that, in the short run, the price level is sticky (fixed) but nominal interest rates adjust to achieve equilibrium in the money market. According to the liquidity preference theory, if the central bank increases the money supply, then short-term nominal interest rates

a rise.

b fall.

c remain unchanged.

All else equal, if the ratio of reserves to deposits increases, the money supply

a increases

b decreases

c remains the same

Depreciation is tax-deductible but based on the historical cost of capital. If inflation is positive, then the corporate income tax ---- investment.

a encourages

b discourages

c has no effect on

If the price index for capital goods is the same as the price index for other goods, an index of the real cost of capital, in the absence of taxes, is the

a nominal interest rate plus the depreciation rate.

b real interest rate plus the depreciation rate.

c purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate.

d purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate.

23.

Shoe-leather costs refer to the costs of:

	the raw material used in production.
	the increased number of transactions as inflation increases.
	living adjustments as inflation increases.
	the raw material used in production, the increased number of transactions as inflation increases, and living adjustments as inflation increases.

24.

Unit-of-account costs of inflation are the:

	costs associated with money being a less reliable unit of measurement.
	costs of transactions associated with avoiding the inflation tax.
	costs associated with businesses changing prices.
	transfers the government gets from printing money.

25.

Menu costs of inflation are the:

	costs associated with money being a less reliable unit of measurement.
	costs of transactions associated with avoiding the inflation tax.
	costs associated with businesses changing prices.
	revenue the government gets from printing money.

26.

Which statement is true?

	Unexpected inflation benefits lenders and hurts borrowers.
	Unexpected inflation benefits borrowers and hurts lenders.
	Unexpected inflation benefits borrowers but does not affect lenders.
	Unexpected deflation benefits lenders but does not affect borrowers.