Exam 22: Taxes on Savings

Assume that the nominal rate of interest is 10% and the inflation rate is 10%.The tax rate on interest from savings is 25%; in the first period,Wes has $100 in savings.After taxes,what will Wes's nominal savings be one year from now?

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Question 1

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Jesse earns income equal to $82,000 in the first period,but his income will drop to $19,170 in the second period. (a)Sketch his intertemporal budget constraint,assuming a 6.5% rate of interest.Add an indifference curve that assumes he optimally chooses to save $40,000 in the first period. (b)Show the effect of a 50% tax on interest income,assuming the substitution and income effects cancel each other out.

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(a) The intertemporal budget constraint can be plotted on a graph with the first period income on the x-axis and the second period income on the y-axis. Assuming a 6.5% interest rate, the equation for the intertemporal budget constraint can be written as:

Y2 = (1 + r)(Y1 - S) + T

Where Y1 and Y2 represent the income in the first and second periods, r is the interest rate, S is the amount saved, and T is the tax on interest income.

If Jesse chooses to save $40,000 in the first period, his intertemporal budget constraint would be represented by a straight line with a slope of (1 + 0.065) and a y-intercept of $19,170. This represents the maximum amount he can consume in each period given his income and the interest rate.

An indifference curve can also be added to the graph to show the combinations of first and second period consumption that provide Jesse with the same level of satisfaction. If Jesse optimally chooses to save $40,000 in the first period, the indifference curve would intersect the intertemporal budget constraint at the point where he chooses to consume in both periods.

(b) If a 50% tax is imposed on interest income, the effect on Jesse's intertemporal budget constraint would depend on whether the substitution and income effects cancel each other out. If the substitution and income effects cancel each other out, then the intertemporal budget constraint would shift inward, reducing the amount Jesse can consume in both periods. This would be represented by a parallel shift of the budget constraint inward, reducing the maximum consumption possibilities in both periods.

Suppose the government was to eliminate taxes on interest from savings.Which of the following statements is NOT consistent with economic theory?

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Question 3

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What is an employer-sponsored plan in which the employer sets aside a certain proportion of a worker's earnings in an investment account,which the worker will receive with investment earnings at retirement?

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Question 4

Which of the following descriptions best defines the intertemporal budget constraint?

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Question 5

Which statement regarding tax-subsidized saving for retirement is TRUE?

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Question 6

A model of savings that accounts for the fact that individual savings serve to smooth consumption over future uncertainties can be defined as a(n):

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Question 7

Suppose that in the first period,a man works,earns income Y,and saves S of the income.In the second (and last)period,the man consumes his savings plus whatever interest it earned (r is the interest rate).How much does the man consume in the second period?

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Question 8

Which of the following is an employer-sponsored plan through which workers accrue certain rights during their tenure at the firm and on retirement are paid a benefit by the firm that is based on tenure at the firm and employee earnings?

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Question 9

How does the precautionary saving model differ from the intertemporal choice model of saving? Discuss the importance of the functioning of credit markets with respect to the precautionary saving model.

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Question 10

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).What is the opportunity cost of first-period consumption?

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Question 11

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).How much does the woman consume in the second period if S = 0?

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Question 12

Suppose that the President and Congress were to pass a law stating that future shortfalls in the Social Security program would be funded with across-the-board increases in income taxes at the time of the shortfalls (and well after their tenure as elected officials).How would you expect this law to affect the relative attractiveness of traditional IRAs versus Roth IRAs to a 25-year-old today? Explain.

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Question 13

Which statement reflects a prediction of the precautionary saving model and the empirical evidence?

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Question 14

If banks raise nominal interest rates to fully offset inflation,the purchasing power of savings will:

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Question 15

Suppose that the government proposes to eliminate unemployment insurance.Which model,the intertemporal choice model of saving or the precautionary saving model,would predict the larger change in savings in consequence? Explain your answer and be sure to note any empirical evidence that might be relevant.

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Question 16

Suppose that the government starts taxing interest on savings.The substitution effect ; the income effect __.

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Question 17

What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?

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Question 18

Assume that the nominal rate of interest is 10% and that the inflation rate is 10%.The real rate of interest:

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Question 19

Suppose that you are going to save $1,000 of your income for one year,after which you will spend it along with any accumulated interest you earned.Assume that your marginal income tax rate is 50%.Consider the following two options: Option 1: Invest in a regular savings account earning 10% interest. Option 2: Invest in an IRA earning 10% interest. Determine the after-tax value of your savings a year from now under both options.If the amounts are the same,explain why.If the amounts are different,explain why they are different.

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Question 20

Showing 1 - 20 of 43

Assume that the nominal rate of interest is 10% and the inflation rate is 10%.The tax rate on interest from savings is 25%; in the first period,Wes has $100 in savings.After taxes,what will Wes's nominal savings be one year from now?

Suppose the government was to eliminate taxes on interest from savings.Which of the following statements is NOT consistent with economic theory?

What is an employer-sponsored plan in which the employer sets aside a certain proportion of a worker's earnings in an investment account,which the worker will receive with investment earnings at retirement?

Which of the following descriptions best defines the intertemporal budget constraint?

Which statement regarding tax-subsidized saving for retirement is TRUE?

A model of savings that accounts for the fact that individual savings serve to smooth consumption over future uncertainties can be defined as a(n):

Suppose that in the first period,a man works,earns income Y,and saves S of the income.In the second (and last)period,the man consumes his savings plus whatever interest it earned (r is the interest rate).How much does the man consume in the second period?

Which of the following is an employer-sponsored plan through which workers accrue certain rights during their tenure at the firm and on retirement are paid a benefit by the firm that is based on tenure at the firm and employee earnings?

How does the precautionary saving model differ from the intertemporal choice model of saving? Discuss the importance of the functioning of credit markets with respect to the precautionary saving model.

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).What is the opportunity cost of first-period consumption?

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).How much does the woman consume in the second period if S = 0?

Which statement reflects a prediction of the precautionary saving model and the empirical evidence?

If banks raise nominal interest rates to fully offset inflation,the purchasing power of savings will:

Suppose that the government starts taxing interest on savings.The substitution effect ; the income effect __.

What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?

Assume that the nominal rate of interest is 10% and that the inflation rate is 10%.The real rate of interest:

Why Study Public Finance

Theoretical Tools of Public Finance

Empirical Tools of Public Finance

Budget Analysis and Deficit Financing

Externalities- Problems and Solutions

Externalities in Action- Environmental and Health Externalities

Public Goods

Cost-Benefit Analysis

Political Economy

State and Local Government Expenditures

Education

Social Insurance- the New Function of Government

Social Security

Unemployment Insurance, disability Insurance, and Workers Compensation

Health Insurance I- Health Economics and Private Health Insurance

Health Insurance Ii- Medicare, medicaid, and Health Care Reform

Income Distribution and Welfare Programs

Taxation- How It Works and What It Means

The Equity Implications of Taxation- Tax Incidence

Taxes on Labor Supply

Taxes on Risk Taking and Wealth

Taxation of Business Income

Fundamental Tax Reform and Consumption Tax

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Exam 22: Taxes on Savings

Assume that the nominal rate of interest is 10% and the inflation rate is 10%.The tax rate on interest from savings is 25%; in the first period,Wes has $100 in savings.After taxes,what will Wes's nominal savings be one year from now?

Suppose the government was to eliminate taxes on interest from savings.Which of the following statements is NOT consistent with economic theory?

What is an employer-sponsored plan in which the employer sets aside a certain proportion of a worker's earnings in an investment account,which the worker will receive with investment earnings at retirement?

Which of the following descriptions best defines the intertemporal budget constraint?

Which statement regarding tax-subsidized saving for retirement is TRUE?

A model of savings that accounts for the fact that individual savings serve to smooth consumption over future uncertainties can be defined as a(n):

Suppose that in the first period,a man works,earns income Y,and saves S of the income.In the second (and last)period,the man consumes his savings plus whatever interest it earned (r is the interest rate).How much does the man consume in the second period?

Which of the following is an employer-sponsored plan through which workers accrue certain rights during their tenure at the firm and on retirement are paid a benefit by the firm that is based on tenure at the firm and employee earnings?

How does the precautionary saving model differ from the intertemporal choice model of saving? Discuss the importance of the functioning of credit markets with respect to the precautionary saving model.

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).What is the opportunity cost of first-period consumption?

Suppose that in the first period,a woman works,earns income Y,and saves S of the income.In the second (and last)period,the woman consumes her savings plus whatever interest it earned (r is the interest rate).How much does the woman consume in the second period if S = 0?

Which statement reflects a prediction of the precautionary saving model and the empirical evidence?

If banks raise nominal interest rates to fully offset inflation,the purchasing power of savings will:

Suppose that the government starts taxing interest on savings.The substitution effect ________; the income effect __________.

What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?

Assume that the nominal rate of interest is 10% and that the inflation rate is 10%.The real rate of interest:

Why Study Public Finance

Theoretical Tools of Public Finance

Empirical Tools of Public Finance

Budget Analysis and Deficit Financing

Externalities- Problems and Solutions

Externalities in Action- Environmental and Health Externalities

Public Goods

Cost-Benefit Analysis

Political Economy

State and Local Government Expenditures

Education

Social Insurance- the New Function of Government

Social Security

Unemployment Insurance, disability Insurance, and Workers Compensation

Health Insurance I- Health Economics and Private Health Insurance

Health Insurance Ii- Medicare, medicaid, and Health Care Reform

Income Distribution and Welfare Programs

Taxation- How It Works and What It Means

The Equity Implications of Taxation- Tax Incidence

Taxes on Labor Supply

Taxes on Risk Taking and Wealth

Taxation of Business Income

Fundamental Tax Reform and Consumption Tax

Filters

Suppose that the government starts taxing interest on savings.The substitution effect ; the income effect __.