Question 1

Kaitlyn purchased one share of Northwest Energy stock for $200;one year later she sold that share for $400.The inflation rate over the year was 50 percent.The tax rate on nominal capital gains is 50 percent.What was the tax on Kaitlyn's capital gain?

Accepted Answer

To calculate Kaitlyn's capital gain, we need to adjust the original purchase price for inflation. 
The new cost basis = original cost basis x (1 + inflation rate) 
New cost basis = $200 x (1 + 0.50) 
New cost basis = $300

Kaitlyn's capital gain is $400 - $300 = $100.

The tax on the capital gain is 50% of $100, which is $50.

Therefore, the answer is C.

Question 2

Serena purchased 10 shares of GLC,Inc.stock for $200 per share;one year later she sold the 10 shares for $220 a share.Over the year,the price level increased from 135.0 to 143.1.The tax rate on capital gains is 50 percent.If the capital gains tax is on nominal gains,how much tax does Serena pay on her gain?

Accepted Answer

Serena's nominal gain is ($220 - $200) = $20 per share. 
Her total nominal gain is ($20 x 10) = $200.
50% of her nominal gain is ($200 x 0.5) = $100.
Therefore, Serena pays $100 in capital gains tax.

Question 3

Wealth is redistributed from creditors to debtors when inflation was expected to be

Accepted Answer

When inflation is expected to be low but it turns out to be high, creditors lose out because they receive payment in dollars that have less purchasing power than the dollars they lent out. However, debtors benefit because they are paying back loans with dollars that are worth less than when they borrowed them. This leads to a redistribution of wealth from creditors (who have excess dollars) to debtors (who have borrowed those dollars).

Question 4

James took out a fixed-interest-rate loan when the CPI was 200.He expected the CPI to increase to 206 but it actually increased to 204.The real interest rate he paid is

Accepted Answer

The answer of James took out a fixed-interest-rate loan when...

Question 5

During the last tax year you lent money at a nominal rate of 6 percent.Actual inflation was 1 percent,but people had been expecting 1.5 percent .This difference between actual and expected inflation

Accepted Answer

The difference between actual and expected inflation means that the lender (you) earned a higher real interest rate than what the borrower had expected. This transfer of wealth from the borrower to you is equal to the difference between the nominal interest rate and the actual inflation rate, which is 6% - 1% = 5%. However, the after-tax real interest rate is lower due to taxes. The actual increase in after-tax real interest rate is equal to the nominal interest rate minus the inflation rate minus the tax rate. Assuming a tax rate of 30%, the after-tax real interest rate increase is 6% - 1% - 30% = 4.5%, which is 0.5% higher than what you had expected. Therefore, the correct answer is A.

Question 6

The country of Lessidinia has a tax system identical to that of the United States.Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency)in 1960 when the price index equaled 100.In 2002,the person sold the land for 100,000 foci,and the price index equaled 600.The tax rate on nominal gains was 20 percent.Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.

Accepted Answer

The nominal gain is calculated as (sale price - purchase price) = (100,000 - 20,000) = 80,000 foci. The inflation rate from 1960 to 2002 can be calculated as (600 - 100)/100 = 5, and the real purchase price in 2002 prices can be calculated as (20,000 x 5) = 100,000 foci. Therefore, the real gain is (100,000 - 100,000) = 0 foci. 
The taxes on the nominal gain are (0.2 x 80,000) = 16,000 foci. 
The after-tax real rate of capital gain is ((100,000 - 16,000) - 100,000)/100,000 = -0.16, or -16 percent. 
Therefore, the correct choice is B, -30 percent.

Question 7

Suppose one year ago the price index was 120 and Maria purchased $20,000 worth of bonds.One year later the price index is 126.Maria redeems her bonds for $22,700 and is in a 40 percent tax bracket.What is Maria's real after-tax rate of interest to the nearest tenth of a percent?

Accepted Answer

First, we need to calculate the inflation rate for the year using the price index:

Inflation rate = (126-120)/120 = 0.05 or 5%

Next, we need to calculate the before-tax rate of return on Maria's bonds:

Before-tax rate of return = ($22,700/$20,000) - 1 = 0.135 or 13.5%

Now we can calculate Maria's taxable income from the bond investment:

Taxable income = (0.4) x (0.135) x ($20,000) = $1,080

Finally, we can calculate Maria's after-tax rate of return:

After-tax rate of return = (1 - 0.4) x (0.135 - 0.05) = 0.051 or 5.1%

Therefore, the answer is B (5.1 percent).

Question 8

If the economy unexpectedly went from inflation to deflation,

Accepted Answer

In deflation, the value of money increases, so creditors gain as the real value of the money they are owed increases, while debtors lose as the real value of their debt increases.

Question 9

Jennifer took out a fixed-interest-rate loan when the CPI was 100.She expected the CPI to increase to 103 but it actually increased to 105.The real interest rate she paid is

Accepted Answer

The real interest rate is lower than expected because inflation was higher than anticipated, reducing the real value of the loan.

Question 10

If inflation is lower than what was expected,

Accepted Answer

If inflation is lower than expected, the real interest rate (nominal rate minus inflation) is higher than anticipated. Debtors end up paying a higher real interest rate than they expected, as the nominal rate remains the same but inflation is lower.

Question 11

The country of Robinya has a tax system identical to that of the United States.Suppose someone in Robinya bought a parcel of land for 10,000 deera (the local currency)in 1970 when the price index equaled 100.In 2010,the person sold the land for 100,000 deera,and the price index equaled 500.The tax rate on nominal capital gains was 20 percent.Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2010 prices to find the after-tax real rate of capital gain.

Accepted Answer

The answer of The country of Robinya has a tax...

Question 12

Which of the following is correct? Inflation

Accepted Answer

The answer of Which of the following is correct? Inflation
...

Question 13

Wealth is redistributed from creditors to debtors when inflation is

Accepted Answer

Wealth is redistributed from creditors to debtors when inflation is unexpectedly high because the real value of the money that debtors owe is less than what was anticipated at the time the loan was made. Creditors receive less in real terms than they expected, benefiting debtors.

Question 14

If inflation is higher than what was expected,

Accepted Answer

When inflation is higher than expected, the real interest rate (nominal interest rate minus inflation) is lower than anticipated, benefiting debtors and disadvantaging creditors.

Question 15

Which of the following costs of inflation can be significant even if actual inflation and expected inflation are the same?

Accepted Answer

All of the mentioned costs of inflation can be significant even if actual inflation and expected inflation are the same. Menu costs are the cost of changing listed prices due to inflation, inflation tax is the reduction in real income due to the increase in nominal income caused by inflation, and shoeleather costs are the cost incurred due to excessive money holdings to avoid the loss in purchasing power caused by inflation. These costs exist regardless of the level of inflation expectations.

Question 16

Wealth is redistributed from debtors to creditors when inflation is

Accepted Answer

When inflation is unexpectedly low, the real value of money repaid by debtors is higher than anticipated, benefiting creditors.

Question 17

During the last tax year you lent money at a nominal rate of 6 percent.Actual inflation was 1.5 percent,but people had been expecting 1 percent .This difference between actual and expected inflation

Accepted Answer

The answer of During the last tax year you lent...

Question 18

Indexing the tax system to take into account the effects of inflation would by itself

Accepted Answer

Indexing the tax system to take into account the effects of inflation would mean that only real interest earnings are taxed. This is because inflation erodes the value of money over time, so it would not be fair to tax nominal interest earnings that are simply keeping up with inflation. By indexing the tax system, only the portion of interest earnings that exceed the rate of inflation would be subject to taxation. It would not necessarily mean an end to taxing capital gains or an increase in average tax rates.

Question 19

Steve purchases some land for $30,000.He maintains it,but makes no improvements to it.One year later he sells it for $32,000.Stephanie puts $30,000 in a savings account that pays 6% interest.Steve has to pay the 50% capital gains tax,Stephanie is in the 35% tax bracket.The inflation rate was 2%.Who had the higher before-tax real gain and who had the higher after-tax real gain?

Accepted Answer

Before-tax real gain is calculated as the difference between the selling price and the original price adjusted for inflation. For Steve, the before-tax real gain is:

$32,000 - $30,000*(1+0.02) = $32,000 - $30,600 = $1,400

For Stephanie, the before-tax real gain is:

$30,000*(1+0.06) - $30,000*(1+0.02) = $1,800

Therefore, Stephanie had the higher before-tax real gain.

After-tax real gain takes into account taxes paid on the gains. For Steve, the after-tax real gain is:

($32,000 - $30,000)*0.5*(1-0.5) - $1,400*(1-0.5) = $5,800

For Stephanie, the after-tax real gain is:

$1,800*(1-0.35) = $1,170

Therefore, even though Steve had the higher before-tax real gain, Stephanie had the higher after-tax real gain.

Question 20

Wealth is redistributed from debtors to creditors when inflation was expected to be

Accepted Answer

When inflation is expected to be high but turns out to be low, debtors end up paying back loans with money that is worth more than anticipated, benefiting creditors.

Quiz 17: Money Growth and Inflation: The Costs of Inflation