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%
Assume the tax rate is 30%.
Compute the after-tax nominal interest rate,
then subtract inflation to get the after-tax real interest rate for both cases.
1. The real value of your deposit will grow the same in all cases, because the real interest rate is 5% for every case.
2. You will pay the most taxes in case 3, because the nominal interest rate is the highest.
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