Any Econ people here? How to calculate real interest rates??

[Syringer]

If the nominal interest rate is 10%, inflation is 4% and there is a marginal income-tax rate of 30%, what will be the real interest rate paid on mortgages?
Answer:


a. -1%


b. 1%


c. 3%


d. 6%

I didn't think the marginal income-tax matters, so it's just 10-4% = 6%.. but according to here.. http://www.economist.com/surve...y.cfm?Story_id=1794899

" For instance, if interest rates are 10% and inflation 8%, and your marginal income-tax rate is 40%, then the real interest rate you pay is minus 2%. With 4% interest rates and 2% inflation (ie, the same pre-tax real interest rate), the real after-tax rate is plus 0.4%."

Which is not just the nominal interest minus inflation..

Anyone know how to get that answer?

 

[hdeck]

6%

real interest rate = nominal interest rate adjusted for inflation.

 

[Evadman]

I hear spiders are good at math.

You knew that was coming.

 

[PoPPeR]

econ is teh sux. accounting 4 life!

 

[Syringer]

Originally posted by: hdeck
6%

real interest rate = nominal interest rate adjusted for inflation.

But check out the link, it says when interest rate is 10% and inflation is 8%, with a marginal income rate tax of 40%..real interest is -2%..however with 4% interset and 2% inflcation, "real after tax rate" is .4%?

 

[hdeck]

income tax rate doesnt affect it...

 

[slydecix]

It's C. You don't collect interest on the money that's taken away by income taxes. So you're essentially getting a .10 * 70% = .07 rate after taxes. Subtract the .04 inflation and you get .03

 

[z0mb13]

Originally posted by: hdeck
income tax rate doesnt affect it...

I think the tax rate is for the tax shield for paying mortgage (mortgage payments are deductible)

 

[Syringer]

Originally posted by: Elitebull
It's C. You don't collect interest on the money that's taken away by income taxes. So you're essentially getting a .10 * 70% = .07 rate after taxes. Subtract the .04 inflation and you get .03

AHH, IF ONLY YOU POSTED THAT BEFORE I SUMBITTED MY QUIZ

Thanks though, now I'll know.

 

[Kibbo]

Originally posted by: Syringer

Originally posted by: Elitebull
It's C. You don't collect interest on the money that's taken away by income taxes. So you're essentially getting a .10 * 70% = .07 rate after taxes. Subtract the .04 inflation and you get .03

AHH, IF ONLY YOU POSTED THAT BEFORE I SUMBITTED MY QUIZ

Thanks though, now I'll know.

Yes, and there is a difference between the real interest rate (i-inflation) and after tax real interest rate (i - inflation - tax on investment income).

The way you phrased it messed me up.
Too much economics and too little accounting here.