Question 6

You deposit $1,000 in the bank for one year. Case 1: inflation =0%, nominal interest rate = 10% Case 2: inflation =10%, nominal interest rate = 20%

(a) In which case does the real value of your deposit growth the most? Assume the tax rate is 25%.

(b) In which case do you pay the most taxes?

(c) Compute the after-tax nominal interest rate, then subtract inflation to get the after-tax real interact rate for both cases.