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The table below shows the nominal interest rate and the inflation rate for two different years in the economy of Abudhabi. In both years, the Abudhabian government taxed nominal interest income from saving at a rate of 30%.


Year 1
Nominal Interest Rate 7%
Inflation Rate 2%

Year 2
Nominal Interest Rate 12%
Inflation Rate 6%


*****The higher inflation rate in year 2 reduced the incentive to save in Abudhabi. True or False?

2007-11-25 16:40:44 · 4 answers · asked by Anonymous in Social Science Economics

4 answers

70% of 7% is 4.9% minus adjustment for inflation leaving a net gain of 2.9%

70% of 12% is 8.4% minus adjustment for inflation leaving a net gain of 2.4%

I would say TRUE.

2007-11-25 16:56:07 · answer #1 · answered by Pragmatism Please 7 · 1 0

tax on interst income=30%
real interst rate= nominal interst rate + inflation rate
year1
real interest rate=7+2= 9%
year 2
real interest rate=12+6=18%
therefore people have an incentive to saved more, specially that the tax is constant i'd say
FALSE

2007-11-25 21:36:57 · answer #2 · answered by musa 1 · 0 0

False

2007-11-25 16:49:25 · answer #3 · answered by Anonymous · 0 0

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2016-10-25 02:12:08 · answer #4 · answered by ? 4 · 0 0

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