Assume that marginal income tax rates are constant for everybody and equal to 40%. Also assume...

   

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Assume that marginal income tax rates are constant for everybody and equal to 40%. Also assume that expected after-tax real interest rates (which is what both lenders and borrowers care about) are not affected by anticipated inflation. (a) Calculate the effect of a 3% decrease in anticipated inflation on the nominal interest rate. (b) Show graphically the effect of a 1% decrease in expected inflation on the nominal interest rate in the market for loanable funds. (c) Suppose that the expected after-tax real interest rate is 2% and that the nominal interest rate is 5%. What is the anticipated rate of inflation? Assume that marginal income tax rates are constant for everybody and equal to 40%. Also assume that expected after-tax real interest rates (which is what both lenders and borrowers care about) are not affected by anticipated inflation. (a) Calculate the effect of a 3% decrease in anticipated inflation on the nominal interest rate. (b) Show graphically the effect of a 1% decrease in expected inflation on the nominal interest rate in the market for loanable funds. (c) Suppose that the expected after-tax real interest rate is 2% and that the nominal interest rate is 5%. What is the anticipated rate of inflation?

Answer rating: 100% (QA)

a To calculate the effect of a 3 decrease in anticipated inflation on the nominal interest rate we c... View the full answer