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AP Macroeconomics

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3. You buy a certificate of deposit (CD) that pays a nominal rate of 12% annually. You
have a tax rate of 25%, so if the interest on this CD is taxable (which it may not be)
your after-tax nominal rate is (1 ñ 25%) • 12% = 9%. Since 10% equals .1, we can
rewrite the equation as: (1 ñ .25) • .12 = .09. For parts (A-C), the nominal rate is 12%,
annually and the after-tax nominal rate is 9%.

A. If the inflation rate is 6% and interest on this CD is not taxable, what is the
real interest rate on the CD? Hint: What is the relationship between the real rate of
interest and the nominal rate of interest? (2 points)

B. If the inflation rate is 6% and the interest on this CD is taxable, what is the
real interest rate on the CD? (2 points)

How do I figure out real interest rate? And what do they mean for the hint in question A? PLEASE HELP!!!

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