Several years ago, a Texas bank offered a thirty-year CD with an annual return indexed to inflation. The rate offered was the annual percentage increase in the CPI plus 4 percent. Suppose that you are in the 28 percent marginal tax bracket and require a 5 percent real return after taxes. Suppose also that the annual inflation rate last year was 3 percent, so this year's annual rate on the CD investment is set at 7 percent.

a. Show the after-tax real return you would earn, assuming that the inflation rate stays at 3 percent and the CD rate offered is 7 percent.

b. What ex ante nominal rate should you require stead to ked your after-tax real yield at 5 percent?