Economics homewrk!!?

Question

5. Suppose the government passes a new law that sets a limit on the interest rate that credit card companies can charge on overdue balances. As a result, the nominal interest rate charged by credit card companies falls from 15 percent a year to 7 percent a year. If the average income tax rate is 30 percent, explain how the real after-tax interest rate on overdue credit card balances changes.

Answer 1

When the interest rate is 15 %, the real effective post tax rate is (1-0.3) *0.15 = 0.105 = 10.5%

When the interest rate is reduced to 7 %,

the real effective post tax interest rate is (1-0.3)* 0.07= 0.049 = 4.9 %.