Kevin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The...

 

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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 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 10%. 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 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 3.0 6.5 3.0 Compared with higher inflation rates, lower 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 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 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 10%. 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 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 3.0 6.5 3.0 Compared with higher inflation rates, lower 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

Answer rating: 100% (QA)

Nominal Interest Rate This is the sum of the real interest rate and the inflation rate So for an inf... View the full answer