In Econoland in 2000, people with incomes between $20,000 and $30,000 paid 12% of their income in taxes and people with incomes between $30,001 and $40,000 paid 15%. In 2000, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2001. 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 2001 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

Quizplus · Accepted Answer

The CPI increased from 1.20 to 1.26, which is a 5% increase. To adjust for inflation and keep the real income constant, the tax brackets should also increase by 5%. Therefore, the $20,000-to-$30,000 bracket should be adjusted to $21,000-to-$31,500.

In Econoland in 2000, People with Incomes Between $20,000 and $30,000