Question

Question 19 (1 point) Tara deposits money into an account with a nominal interest rate of 6 percent. She expects inflation to be 2 percent. Her tax rate is 20 percent. Tara’s after-tax real rate of interest Question 19 options: will be 2.8 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent. will be 2.8 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent. will be 3.2 percent if inflation turns out to be 2 percent; it will be higher if inflation turns out to be higher than 2 percent. will be 3.2 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher than 2 percent. Question 20 (1 point) When inflation falls, people Question 20 options: make less frequent trips to the bank and firms make less frequent price changes. make less frequent trips to the bank while firms make more frequent price changes. make more frequent trips to the bank while firms make less frequent price changes. make more frequent trips to the bank and firms make more frequent price changes. Question 21 (1 point) Shoeleather costs arise when higher inflation rates induce people to Question 21 options: spend more time looking for bargains. spend less time looking for bargains. hold more money. hold less money. Question 22 (1 point) Kaitlyn purchased one share of Northwest Energy stock for $200; one year later she sold that share for $400. The inflation rate over the year was 50 percent. The tax rate on nominal capital gains is 50 percent. What was the tax on Kaitlyn’s capital gain? Question 22 options: $50 $75 $100 $200

Answer 1

Answer 19

Correct option is that Tara’s after-tax real rate of interest will be 2.8 percent if inflation turns out to be 2 percent; it will be lower if inflation turns out to be higher.

Explanation: Suppose Tara deposits $ 100. She will get interest of $6 at 6% rate of interest and will have to pay tax at 20% on $6 = 6*20/100=1.20. After tax nominal earnings of Tara is $6-1.20=$4.80. At the deposit of $ 100 After tax nominal return to Tara is $4.8, i.e 4.8 %.

Real rate of interest = Nominal rate of interest-Inflation

So, After-tax rate of interest=After tax nominal rate of interest-Inflation.

At inflation of 2% after-tax real rate of interest =4.8%-2%=2.8%

At inflation higher than 2% it will be lower.

Answer 20

Correct option is that when inflation falls people make less frequent trips to the bank and firms make less frequent price changes.

Answer 21

Correct option is that the Shoeleather costs arise when higher inflation rates induce people to hold less money.

Answer 22

Correct option is $100,i.e 50% of (400-200).