You put money into an account and earn a real interest rate of 6 percent. Inflation is 2 percent, and your marginal tax rate is 30 percent. What is your after-tax real rate of interest?
Select one:
a. 3.6 percent
b. 5.5 percent
c. 2.5 percent
d. 1.6 percent
To find the after-tax real rate of interest, follow these steps:
Step 1: Calculate the nominal interest rate by subtracting the inflation rate from the real interest rate. In this case, the nominal interest rate is 6% - 2% = 4%.
Step 2: Calculate the after-tax nominal interest rate by multiplying the nominal interest rate by (1 - marginal tax rate). In this case, the after-tax nominal interest rate is 4% * (1 - 0.30) = 2.8%.
Step 3: Calculate the after-tax real rate of interest by subtracting the inflation rate from the after-tax nominal interest rate. In this case, the after-tax real rate of interest is 2.8% - 2% = 0.8%.
Therefore, the correct answer is d. 1.6 percent.