In order to receive jull credit you must show your work on y

In order to receive jull credit, you must show your work on your paper. 9. You deposit $5,000 in the bank for one year. Assume the tax rate is 10%. CASE 1: inflation rate 5% nominal interest rate-12% CASE 2: inflation rate = 6%, nominal interest rate = 8% a. How much tax do you pay in Case 1? b. How much tax do you pay in Case 2? c. Compute the after-tax real interest rate for Case d. Compute the after-tax real interest rate for Case 2 e. In which case would you earn the highest real return after tax?

Solution

c) After tax real rate of return = ( 1 - t ) i - inflation = ( 1 - 0.10 ) 12% - 5% = 5.8%

d) After tax real rate of return = ( 1 - t ) i - inflation = ( 1 - 0.10 ) 8% - 6% = 1.2%

e) Highest real return after tax = Case 1