Suppose an Individual Retirement Account (IRA) has a contribution limit of $4,000 per year and that prior to the passage of the law establishing IRAs,Rachel was saving $5,500 per year.Which of the following is the most likely effect?
A) The income effect of the tax subsidy will cause her to save more.
B) The tax subsidy in the IRA will have an inframarginal effect on Rachel's saving.
C) The substitution effect of the tax subsidy will induce Rachel to save less.
D) The tax subsidy in the IRA will have no effect on Rachel's decision to save.
Correct Answer:
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