Question 1

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?

Accepted Answer

A)   $10
B)   $105
C)   $107.50
D)   $110 C

Question 2

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.

Accepted Answer

(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.

Question 3

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

Accepted Answer

A)   People would save more as a result.
B)   People would save less as a result.
C)   The substitution effect of the policy induces people to save less.
D)   The substitution effect of the policy induces people to save more. C

Question 4

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?

Accepted Answer

A)   defined contribution pension plan
B)   defined benefit pension
C)   Keogh account
D)   Individual Retirement Account (IR
A)

Question 5

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

Accepted Answer

A)   an amount equal to the person's total income
B)   the measure of the person's preference for consumption in one period relative to his or her preference in other periods
C)   the measure of the rate at which people can trade off consumption in one period for consumption in another period
D)   the opportunity cost of first-period consumption

Question 6

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

Accepted Answer

A)   Tax subsidies for saving unambiguously increase saving.
B)   The income effect of tax subsidies for saving induces individuals to save more.
C)   The substitution effect of tax subsidies for saving induces individuals to save less.
D)   The income effect of tax subsidies for saving induces individuals to save less.

Question 7

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):

Accepted Answer

A)   precautionary savings model.
B)   intertemporal budget constraint.
C)   capital income taxation.
D)   liquidity constraint.

Question 8

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?

Accepted Answer

A)   Y(1 + r) 
B)   2Y - S
C)   Y - S
D)   S(1 + r)

Question 9

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?

Accepted Answer

A)   defined contribution pension plan
B)   defined benefit pension plan
C)   Keogh account
D)   401(k) account

Question 10

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.

Accepted Answer

The answer of How does the precautionary saving model differ...

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).What is the opportunity cost of first-period consumption?

Accepted Answer

A)   Y(1 + r) 2
B)   1 + r
C)   Y - S
D)   Y(1 + r)

Question 12

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?

Accepted Answer

A)   0
B)   Y - S
C)   Y + S
D)   Y(1 + r)

Question 13

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.

Accepted Answer

The answer of Suppose that the President and Congress were...

Question 14

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

Accepted Answer

A)   Empirical research suggests that expansions of social insurance programs cause savings to increase.
B)   Empirical research suggests that expansions of social insurance programs cause savings to decrease.
C)   The precautionary saving model predicts that an expansion of a social insurance program should cause savings to increase.
D)   The prediction of the precautionary saving model is consistent with empirical evidence.

Question 15

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

Accepted Answer

A)   remain the same when capital income is taxed.
B)   decrease when capital income is not taxed.
C)   increase when capital income is not taxed.
D)   increase when capital income is taxed.

Question 16

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.

Accepted Answer

The answer of Suppose that the government proposes to eliminate...

Question 17

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

Accepted Answer

A)   induces the person to save more; induces the person to save more
B)   induces the person to save more; induces the person to save less
C)   induces the person to save less; induces the person to save more
D)   does not affect savings; does not affect savings

Question 18

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

Accepted Answer

The answer of What four initiatives did President Obama introduce...

Question 19

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

Accepted Answer

A)   cannot be determined from the given information.
B)   is 0%.
C)   is 10%.
D)   is 20%.

Question 20

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.

Accepted Answer

The answer of Suppose that you are going to save...

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: