You chose the correct answer.
Here is the calculation:

I = P ´ r ´ t
I = 1,000 ´ 0.05 ´ 1
I = 50 ´ 1
I = $50

Bob made $50 from interest in 1 year.

The rate of inflation is still 3.5% while Bob’s CD’s is giving him a 5% interest rate. Thus, Bob is ahead 1.5% this year. Investing in a CD, Bob is ahead $15 after inflation. However, Bob has to pay tax on the $50 he earned from interest. Assuming Bob’s tax rate is 30%, he has to pay $15 tax. Thus, Bob makes no money after tax.

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