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Suppose you put $100 in the bank on January 1, 2017. If the annual nominal interest rate is 5 percent, the inflation rate is 2 percent, and the tax on interest income is 20%, you will be able to buy ________ worth of goods on January 1, 2018, valued at 2017’s prices.

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pedrocarratore

Answer:

$102.40

Explanation:

With an annual nominal interest rate at 5 percent, and an inflation rate at 2 percent, the actual interest rate is 3 percent.

The after tax interest income is given by:

[tex]I = 100*0.03*(1-0.2)\\I=\$ 2.40[/tex]

The final amount valued at 2017's prices is given by the sum of the initial investment to the actual interest income after taxes (I) :

[tex]V = \$100 +\$2.40\\V= \$102.40[/tex]

You will be able to buy $102.40 worth of goods on January 1, 2018, valued at 2017’s prices.

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