Answer:
(d) it will be lower if inflation turns out to be higher than 2 percent
Explanation:
As per Fisher's equation,
(1 + i) = (1 + r) (1 + π) ,
wherein, i denotes nominal rate of interest
r denotes real rate of interest
π denotes the rate of inflation
As per the information provided in the question,
(1 + .06) = (1 + r) (1 + .02)
solving this further, we get,
(1 + r) =
⇒ (1 + r) = 1.0392
⇒ r = .0392 or 3.92%
This is real rate of interest before tax.
The after tax return would be r( 1 - t)
⇒ 3.92 (1 - .20)
⇒ 3.1372 or 3.2% approx
So, after tax real rate of interest will be 3.2% if inflation turns out to be 2% and it will be lower if inflation turns out to be higher than 2.
