8. Inflation-induced tax distortions Rajiv receives a portion of his income from his holdings of interestbearing government bonds. The bonds offer a real interest rate of 2.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the ination rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a lowinflation scenario and a high inflation scenario. Given the realI interest rate of 2. 5% per year, find the nominai interest rate on Rajiv's bonds, the afterrtax nominal interest rate, and the afterrtax reai interest rate under each ination scenario. Ination Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percen t ) (Percen t) (Percent) (Percent) (Percent) Compared with higher ination rates, a lower inflation rate will V the aftertax real interest rate when the government taxes nominal interest income. This tends to V saving, thereby V the quantity of investment in the economy and V the economy's Iongrrun growth rate. Given the real interest rate of 2.5% per year, find the nominal interest rate on Rajiv's bonds, the after-tax nominal interest rate, and the after-ta 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 2.5 increase 7.5 2.5 decrease 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.Given the real interest rate of 2.5% per year, find the nominal interest rate on Rajiv's bonds, the after-tax nominal interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After (Percent) (Percent) (Percent) (Percent) 2.0 2.5 7.5 2.5 encourage discourage Compared with higher inflation rates, a n rate will the after-tax real interest rate when nominal interest income. This tends to saving, thereby the quantity of investmer the economy's long-run growth rate.Given the real interest rate of 2.5% per year, find the nominal interest rate on Rajiv's bonds, the after-tax nominal interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate Afte (Percent) (Percent) (Percent) (Percent) 2.0 2.5 7.5 2.5 increasing decreasing Compared with higher inflation rates, a lower inflation rate will tax real interest rate when nominal interest income. This tends to saving, thereby the quantity of investme the economy's long-run growth rate.Given the real interest rate of 2.5% per year, find the nominal interest rate on Rajiv's bonds, the aft interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interes (Percent) (Percent) (Percent) (Percent) 2.0 2.5 7.5 2.5 increasing higher inflation rates, a lower inflation rate will the after-tax real inte decreasing est income. This tends to saving, thereby the quant the economy's long-run growth rate
