8. Inflation-induced tax distortions Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% 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 3% per year, find the nominal interest rate on Pat'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 (Percent) 2.5 6.5 (Percent) 3.0 3.0 (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to saving, thereby the economy's long-run growth rate. the after-tax real interest rate when the government taxes the quantity of investment in the economy and
8. Inflation-induced tax distortions Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% 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 3% per year, find the nominal interest rate on Pat'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 (Percent) 2.5 6.5 (Percent) 3.0 3.0 (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) Compared with lower inflation rates, a higher inflation rate will nominal interest income. This tends to saving, thereby the economy's long-run growth rate. the after-tax real interest rate when the government taxes the quantity of investment in the economy and
Chapter14: Money And The Economy
Section: Chapter Questions
Problem 12QP
Related questions
Question
![8. Inflation-induced tax distortions
Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% 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 3% per year, find the nominal interest rate on Pat'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
(Percent)
2.5
6.5
(Percent)
3.0
3.0
(Percent)
After-Tax Nominal Interest Rate
(Percent)
After-Tax Real Interest Rate
(Percent)
Compared with lower inflation rates, a higher inflation rate will
nominal interest income. This tends to
saving, thereby
the economy's long-run growth rate.
the after-tax real interest rate when the government taxes
the quantity of investment in the economy and](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F63184a12-3ed6-4327-a045-3b3052a99a07%2F82b992b9-0b89-4960-a8e1-1c62997c1b9b%2Fimpsaj8_processed.jpeg&w=3840&q=75)
Transcribed Image Text:8. Inflation-induced tax distortions
Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% 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 3% per year, find the nominal interest rate on Pat'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
(Percent)
2.5
6.5
(Percent)
3.0
3.0
(Percent)
After-Tax Nominal Interest Rate
(Percent)
After-Tax Real Interest Rate
(Percent)
Compared with lower inflation rates, a higher inflation rate will
nominal interest income. This tends to
saving, thereby
the economy's long-run growth rate.
the after-tax real interest rate when the government taxes
the quantity of investment in the economy and
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