In Econoland in 2005, people with incomes between $20,000 and $30,000 paid 12 percent of their income in taxes and people with incomes between $30,001 and $40,000 paid 15 percent. In 2005, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2006. If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000-to-$30,000 bracket will be changed in 2006 to:
A)$15,873 to $23,810.
B)$21,000 to $31,500.
C)$24,000 to $37,800.
D)$25,200 to $37,800.

Question

In Econoland in 2005, people with incomes between $20,000 and $30,000 paid 12 percent of their income in taxes and people with incomes between $30,001 and $40,000 paid 15 percent. In 2005, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2006. If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000-to-$30,000 bracket will be changed in 2006 to:
A)$15,873 to $23,810.
B)$21,000 to $31,500.
C)$24,000 to $37,800.
D)$25,200 to $37,800.

Quizplus · Accepted Answer

The inflation rate between 2005 and 2006 was: (1.26 - 1.20)/ 1.20 = 0.05 or 5 percent, so the tax bracket needs to be adjusted by that amount: $20,000 × 1.05 = $21,000 and $30,000 × 1.05 = $31,500.

In Econoland in 2005, People with Incomes Between $20,000 and $30,000