In Econoland in 2008, people with incomes between $20 000 and $30 000 must pay 12% of their income in taxes, and people with incomes between $30 001 and $40 000 must pay 15%.In 2008, the CPI in Econoland equals 1.20 and increases to 1.26 in 2009.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 to:

Question

Quizplus · Accepted Answer

To adjust for inflation, we need to multiply the income ranges by the CPI ratio for each year. For the $20 000 to $30 000 income range, the adjusted range for 2009 would be $24 000 to $36 000 (20 000 x 1.2 = 24 000 and 30 000 x 1.2 = 36 000). To prevent households in this income range from moving into the higher tax bracket, we need to adjust the range so that the upper limit remains below $30 001 (the threshold for the higher tax bracket). Using the adjusted range for 2009, the maximum income for the lower tax bracket would be $31 500 (30 000 x 1.05 = 31 500). Therefore, choice B, $21 000 to $31 500, is the best option.

In Econoland in 2008, People with Incomes Between $20 000