Compared to higher inflation rates a lower inflation rate will increase or decrease the after-tax real interest rate when the government taxes nominal interest income. This tend to encourage or discourage saving, thereby increasing or decreasing the quantity of investment in the economy and increasing or decreasing the economy's long-run growth rate.

Back to Assignment and Study Tools Attempts Keep the Highest / 2 Options 12. Inflation-induced tax distortions e Success Tips Tim receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. r Success Tips 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. Feedback Given the real interest rate of 4.5% per year, find the nominal interest rate on Tim'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 4.5 7.0 4.5 Compared with higher inflation rates, a lower inflation rate will the after-tax real interest rate when the government taxes nominal interest income. This tends to saving, thereby the quantity of investment in the economy and the economy's long-run growth rate