3. If the marginal tax rate on nominal interest payments is 25%, compute the before-tax...
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3. If the marginal tax rate on nominal interest payments is 25%, compute the before-tax real interest rate (i.e., the real interest rate if there were no tax) and the after-tax real interest rate (the rate of return after taxes are taken out) in each of the following cases: a. The nominal interest rate is 10% and the inflation rate is 5%. d. In general, with the 25% marginal tax on nominal interest, how much does the before-tax nominal interest rate have to rise to compensate for a one- percentage-point rise in inflation in order to keep the after-tax real interest rate unchanged? What does this imply about the Fisher effect in an economy in which nominal interest is taxed? Would the same be true if the government taxed real interest income rather than nominal? Explain
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