Answer:
The after tax real interest rate of interest is 2%
Explanation:
The after tax real interest rate is computed as follows:
Given,
Nominal interest rate is 5%
Inflation rate is 2%
Computing before tax real interest rate as:
Before tax real interest rate = Nominal interest rate - Inflation rate
= 5% - 2%
= 3%
Computing tax:
= 20% tax on nominal interest rate
= 20% × 5%
= 1%
Now, computing after tax real interest rate as:
After tax real interest rate = Before tax real interest rate - Tax
= 3% - 1%
After tax real interest rate = 2%
