Question

In: Economics

Ivy bought some shares of stock and, over the next year, the price per share increased...

Ivy bought some shares of stock and, over the next year, the price per share increased by 5 percent, while the price level went up by 3%. Before taxes, Ivy experienced

a. both a nominal gain and a real gain, and Ivy paid taxes on the nominal gain.

b. both a nominal gain and a real gain, and Ivy paid taxes only on the real gain.

c. a nominal gain, but no real gain, and Ivy paid taxes on the nominal gain.

d. a nominal gain, but no real gain, and Ivy paid no taxes on the transaction.

Solutions

Expert Solution

In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not changed on average.

Ivy bought some shares of stock and, over the next year, the price per share increased by 5 percent, this shows that now if she sells her shares she will get more money than what she spent before, this shows that she has a nominal gain.

But at the same time, the price level went up by three percent. This shows that her income increased by 5% and price level increased by 3%, so even with the increase in inflation she gains 2% (5-3=2%), this shows that she also have a real gain because now she can buy more goods and services than before because her overall (real) gain/income has increased.

Nothing is mentioned about tax here, but if she paid taxes she must have paid on nominal gain.

So according to me option a. is correct.


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