Shen receives a portion of his income from his holdings of interest-bearing U. S

Question

Shen receives a portion of his income from his holdings of interest-bearing U. S. government bonds. The bonds offer a real interest rate of 2. 0% per year. The nominal interest rate on the bonds adjusts automatically to the inflation rate. The government taxes nominal interest income at a rate of 10%. The table below shows two scenarios, a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 2. 0% per year, find the nominal interest rate on Shen's bonds, the after-tax nominal interest rate, and the after-tax real Interest rate under each Inflation scenario. Find the nominal interest rate in lower inflation, -1. 0% 1. 0% 2. 0% 5. 0% None of the above Find the after-tax nominal interest rate in lower inflation, 0. 20% 1. 20% 4. 50% 10% None of the above Find the after-tax real interest rate in higher inflation, -0. 20 % 1. 2 0% 3. 5 0% 10 % None of the above

Explanation / Answer

The correct answers are : Q8) c.2% Q9) b.2 x 0.9 = 1.80% 10) c. 3.50 %

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