Business, 06.05.2020 05:27 olivernolasco23

Jake receives a portion of his income from his holdings of interest-bearing U. S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate.

Given the real interest rate of 4.5% per year, find the nominal interest rate on Sean's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.

Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax After-Tax
Nominal Interest Rate Real Interest Rate

(Percent) (Percent) (Percent) (Percent) (Percent)

2.0 4.5
8.5 4.5

Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to saving, thereby the quantity of investment in the economy and the economy's long-run growth rate.

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Jake receives a portion of his income from his holdings of interest-bearing U. S. government bonds....

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