2. Double taxation from inflation. You earned $1,000 this year after taxes. You need to decide...

 

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2. Double taxation from inflation. You earned $1,000 this year after taxes. You need to decide whether you will save the money or spend it on a vacation. A key part of that decision is the rate of return that you would earn if you saved the money. Assume that the nominal (annual) interest rate is 8%. (a) Assume annual inflation is 2%. Assume also that you pay a 10% tax rate on nominal interest income. If you save the money, what is your real rate of return after taxes? (b) Solve again for your real rate of return if instead the inflation rate is 7% and your tax rate is 10%. (c) Now assume annual inflation is again 2%, but your tax rate has increased to 25%. If you save the money, what is your real rate of return after taxes? (d) Finally, solve again for your real rate of return if instead the inflation rate is 7% and your tax rate is 25%. (e) Based on your results, in a few sentences, summarize how inflation and taxation jointly affect the real after-tax rate of return on savings. 2. Double taxation from inflation. You earned $1,000 this year after taxes. You need to decide whether you will save the money or spend it on a vacation. A key part of that decision is the rate of return that you would earn if you saved the money. Assume that the nominal (annual) interest rate is 8%. (a) Assume annual inflation is 2%. Assume also that you pay a 10% tax rate on nominal interest income. If you save the money, what is your real rate of return after taxes? (b) Solve again for your real rate of return if instead the inflation rate is 7% and your tax rate is 10%. (c) Now assume annual inflation is again 2%, but your tax rate has increased to 25%. If you save the money, what is your real rate of return after taxes? (d) Finally, solve again for your real rate of return if instead the inflation rate is 7% and your tax rate is 25%. (e) Based on your results, in a few sentences, summarize how inflation and taxation jointly affect the real after-tax rate of return on savings.

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Step 12 a Assume annual inflation is 2 Assume also that you pay a 10 tax rate on nominal interest in... View the full answer