Answer
a) before tax, real interest rate: 5%, after tax, real interest rate: 1%
b) before tax, real interest rate: 4%, after tax, real interest rate: 1.6%
c) before tax, real interest rate: 3%, after tax, real interest rate: 1.4%
Work Step by Step
nominal interest rate = inflation + real interest rate (n = i + r)
nominal interest rate * tax = after tax, nominal interest rate (n * t = an)
after tax, nominal interest rate - inflation = after tax, real inflation rate (an - i = rn)
a)
n = 10, i = 5, t = .4
$10 * .4 =4$
$10-4=6$
$6 - 5 =1$
$10 = i+r$
$10=5+r$
$5=r$
b)
n = 6, i = 2, t = .4
$6*.4 =2.4$
$6-2.4 = 3.6$
$3.6-2=1.6$
$6=i+r$
$6=2+r$
$6=2+4$
c)
n = 4, i = 1, t = .4
$4=1+r$
$3=r$
$4*.4=1.6$
$4-1.6=2.4$
$2.4-1=1.4$
