Answer to Question #196988 in Macroeconomics for olive

Question

Assume that in Azerbaijan, Alyana deposits $5,000 in the bank for a single year. Given the following cases, answer the questions.

 

CASE 1: inflation = 0%, nominal interest rate = 5%

CASE 2: inflation = 5%, nominal interest rate = 10%

CASE 3: inflation = 10 %, nominal interest rate = 15%

 

1. In which case does the real value of your deposit grow the most? 

 

Assume the tax rate is 30%. 

 

1. In which case do you pay the most taxes?
2. Compute the after-tax nominal interest rate,
3. then subtract inflation to get the after-tax real interest rate for both cases.

 

Answer 1

Compute required figures as below:

Resultant table:

Hence,

• In Real-Value, Deposit grows highest in Case 1
• Investor will pay highest taxes in Case 3
• After-Tax Real & Nominal Interest for Case 1 is 3.50% whereas for Case 3 After-Tax Real Rate is 0.50% whereas After-Tax Nominal Rate is 10.50%