What is the marginal propensity to consume, and why is it always less than one?
27) How would the expected real after-tax rate of return be affected by each of the following events?
(1)the tax rate on interest income increases
(2)expected inflation declines
28) Sally will earn $30,000 this year and $40,000 next year. The real interest rate is 20% between this year and next year; she can borrow or lend at this rate. She has no wealth at the start of this year and plans to finish next year having consumed everything she possibly can. She would like to consume the same amount this year as next year. The inflation rate is 0%.
(a)How much should Sally save this year? How much will Sally consume in each of the two years?
(c)How would your answers change if the real interest rate was 40%?
29) Jane wants to save $1000 of current income. With an IRA, no taxes are paid on income or interest until the money is withdrawn in five years. Without an IRA, taxes must be paid whenever income or interest is received. Jane's federal/state tax bracket is 35%, and the nominal interest rate is 8%.
(a)How much money will Jane have if she puts her money in an IRA and withdraws the money in five years?
(b)How much money will Jane have if she does NOT put her money in an IRA, but rather in a regular (taxable) savings account, for five years?
(c)How much does Jane gain in five years by using an IRA rather than a regular savings account?
30) Suppose the one-year T-bill rate was 5% on 1/1/2007, 4% on 1/1/2008, and 6% on 1/1/2009. The GDP deflator (2004 = 100) was 110 on 1/1/2007, 112 on 1/1/2008, 114 on 1/1/2009, and 120 on 1/1/2010. The tax rate on interest income is 30%.
(a)Calculate the after-tax nominal rate of return for 2007, 2008, and 2009.
(b)If you began with $1000 on 1/1/2007 and invested in T-bills each year (paying taxes at theend of each year), how much would you have in nominal terms on 1/1/2010? How much would you have in real terms (2004 dollars)?
(c)How much was your nominal after-tax interest earned in part (b) over the three years? How much did you earn in real (2004) after-tax dollars?
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