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ANSWER:
Nominal interest rate=Real interest rate+Inflation rate
Given:
Nominal interest rate=2%+8%=10%\text{Nominal interest rate} = 2\% + 8\% = 10\%
Calculate the after-tax nominal interest rate:
After-tax nominal interest rate=Nominal interest rate×(1−Tax rate)\text{After-tax nominal interest rate} = \text{Nominal interest rate} \times (1 - \text{Tax rate})
After-tax nominal interest rate=10%×(1−0.20)=10%×0.80=8%\text{After-tax nominal interest rate} = 10\% \times (1 - 0.20) = 10\% \times 0.80 = 8\%
Calculate the after-tax real interest rate:
After-tax real interest rate=After-tax nominal interest rate−Inflation rate\text{After-tax real interest rate} = \text{After-tax nominal interest rate} - \text{Inflation rate}
After-tax real interest rate=8%−8%=0%
\text{After-tax real interest rate} = 8\% - 8\% = 0\%
