The possible fill in the blank options are as follows in order.

Reduce/Increase Discourage/Incourage Reducing/Increasing Reducing/Increasing

Thanks

Average: 110 Attempts: 9. Inflation-induced tax distortions Aa Aa Alex receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3.5% per year. The nominal interest rate on the bonds adjusts automatically to the inflation rate. Suppose the government taxes nominal interest income at a rate of 20%. The following table shows two scenarios, a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 3.5% per year, find the nominal interest rate on Alex's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Lower Inflation Higher Inflation Inflation Rate 2.5% 6.5% 3.5% Real Interest Rate 3.5% Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate 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