Question 1

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 2

Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?

Accepted Answer

To calculate the after-tax real interest rate, we need to subtract the inflation rate and the taxes paid on the interest earned from the nominal interest rate. The highest after-tax real interest rate will be earned when inflation is the lowest and the tax rate is the highest. In this case, option D has the lowest inflation rate of 2 percent and the highest tax rate of 50 percent, making it the best choice.

Question 3

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Accepted Answer

The answer of You put money into an account that...

Question 4

You put money into an account that earns an 8 percent nominal interest rate. The inflation rate is 5 percent, and your marginal tax rate is 10 percent. What is your after-tax real rate of interest?

Accepted Answer

The answer of You put money into an account that...

Question 5

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 6

Which of the following is correct? Inflation

Accepted Answer

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

Question 7

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

Accepted Answer

All three costs of inflation (menu costs, inflation tax, and shoeleather costs) can still be significant even if actual inflation and expected inflation are the same. Menu costs refer to the expenses firms incur to update prices and menus, which they must do even if inflation is expected and follows its predicted course. Inflation tax is the reduction in the purchasing power of money due to inflation, which still occurs even if actual inflation is equal to expected inflation. Shoeleather costs refer to the increased costs of transactions as people must make more trips to the bank and carry more cash due to inflation, which results in additional time and effort costs for individuals even if actual inflation equals expected inflation.

Question 8

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

Question 9

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Accepted Answer

The answer of Given a nominal interest rate of 6...

Question 10

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 11

Suppose that in some tax year you earned a nominal interest rate of 6 percent. During the time you held these funds inflation was 1 percent. You compute that you made a real after-tax interest rate of 3 percent. What was your tax rate?

Accepted Answer

To calculate the real after-tax interest rate, we need to adjust the nominal interest rate by subtracting the inflation rate and the tax rate. Let's start with the formula:
Real after-tax interest rate = (1 + nominal interest rate) / (1 + inflation rate) * (1 - tax rate) - 1

Plugging in the given values, we get:
3% = (1 + 6%) / (1 + 1%) * (1 - tax rate) - 1

Simplifying the equation:
4% = 5% * (1 - tax rate)
1 - tax rate = 4/5
tax rate = 1/5 = 0.2 = 20%

Therefore, the tax rate is 20%, which corresponds to option B.

Question 12

In which of the following cases is the after-tax real interest rate highest?

Accepted Answer

The answer of In which of the following cases is...

Question 13

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

Accepted Answer

The after-tax real rate of interest is calculated as nominal interest rate - inflation rate - (tax rate x inflation rate). Therefore, the after-tax real rate of interest will be lowest when both inflation and tax rates are high. In option A, inflation rate is high at 4 percent and tax rate is relatively low at 5 percent, resulting in a lower after-tax real rate of interest compared to the other options.

Question 14

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Accepted Answer

To calculate the after-tax real rate of interest, we need to subtract the inflation rate and the taxes paid from the nominal interest rate.
A) After-tax real rate of interest = 6% - 2.5% - 25% = 2.13%
B) After-tax real rate of interest = 6% - 3% - 20% = 2.4%
C) After-tax real rate of interest = 6% - 2% - 30% = 3.2%
D) The after-tax real interest rate is not the same for all options.

Therefore, option C, where inflation is the lowest and the tax rate is the highest, leads to the highest after-tax real rate of interest.

Question 15

You put money into an account and earn a real interest rate of 6 percent. Inflation is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

Accepted Answer

The answer of You put money into an account and...

Question 16

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 the real interest earnings are taxed. This is because inflation reduces the purchasing power of money, and if the tax system does not account for inflation, individuals may end up paying taxes on nominal gains that do not reflect actual increases in wealth. Indexing the tax system to inflation helps ensure that individuals are only taxed on their real gains, rather than the nominal ones.

Question 17

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 18

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 19

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

Kaitlyn's nominal capital gain is $200 ($400 - $200). With the inflation rate of 50%, her real capital gain is only $133.33 [($400/$200)-1]. The tax on her nominal gain is 50%, so she owes $100 ($200 x 0.5).

Question 20

Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Accepted Answer

The after-tax real rate of interest is calculated by subtracting the inflation rate and the tax rate from the nominal interest rate. 
For option A, the after-tax real rate of interest would be 1.7% (5% - 3% - 15%). 
For option B, the after-tax real rate of interest would be 1.2% (5% - 2% - 40%). 
For option C, the after-tax real rate of interest would be 1.5% (5% - 1% - 50%). 
Therefore, option C would give the highest after-tax real rate of interest.

Quiz 30: Money Growth and Inflation

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?

Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

You put money into an account that earns an 8 percent nominal interest rate. The inflation rate is 5 percent, and your marginal tax rate is 10 percent. What is your after-tax real rate of interest?

Which of the following is correct? Inflation

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

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

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

Suppose that in some tax year you earned a nominal interest rate of 6 percent. During the time you held these funds inflation was 1 percent. You compute that you made a real after-tax interest rate of 3 percent. What was your tax rate?

In which of the following cases is the after-tax real interest rate highest?

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after-tax real rate of interest?

Given a nominal interest rate of 6 percent, in which of the following cases would you earn the highest after-tax real rate of interest?

You put money into an account and earn a real interest rate of 6 percent. Inflation is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

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

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

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?

Given a nominal interest rate of 5 percent, in which of the following cases would you earn the highest after-tax real rate of interest?