Use this fact to adjust each of the following 1947 prices for the effects of inflation. Chapter 11 in Mankiw defines the real interest rate as the nominal interest rate less inflation. Because the US tax code taxes nominal interest income, we can define the after-tax interest rate as the nominal interest rate after taxes, less inf lation. Suppose that the inflation rate is 0 percent, the nominal interest rate is 3 percent, and the tax rate is 33 percent. Now suppose that the inflation rate rises to 3 percent, and the nominal interest rate rises to 6 percent.
Some economists argue that because of our tax system, inflation discourages savings.
People in northern states spend more on house heating than do people in southern states.