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8. Inflation-induced tax distortions Kevin 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% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Kevin'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 Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.0 8.0 4.0 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to the economy's long-run growth rate. saving, thereby the after-tax real interest rate when the government taxes the quantity of investment in the economy and

8. Inflation-induced tax distortions Kevin 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% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Kevin'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 Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.0 8.0 4.0 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to the economy's long-run growth rate. saving, thereby the after-tax real interest rate when the government taxes the quantity of investment in the economy and

Brief Principles of Macroeconomics (MindTap Course List)
Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: Money Growth And Intlation
Section: Chapter Questions
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B 8. Inflation-induced tax distortions Kevin receives a portion of his income from his holdings of interest-bearing US government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Kevin'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 Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.0 4.0 8.0 4.0 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to the economy's long-run growth rate. saving, thereby After-Tax Real Interest Rate (Percent) the after-tax real interest rate when the government taxes the quantity of investment in the economy and
Transcribed Image Text:B 8. Inflation-induced tax distortions Kevin receives a portion of his income from his holdings of interest-bearing US government bonds. The bonds offer a real interest rate of 4% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4% per year, find the nominal interest rate on Kevin'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 Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.0 4.0 8.0 4.0 Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to the economy's long-run growth rate. saving, thereby After-Tax Real Interest Rate (Percent) the after-tax real interest rate when the government taxes the quantity of investment in the economy and
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