Question

Question 14 (1 point) Governments may prefer an inflation tax to some other type of tax because the inflation tax Question 14 options: is easier to impose. reduces inflation. falls mainly on high-income individuals. reduces the real cost of government expenditure. Question 15 (1 point) In the U.S., people are required to pay taxes on Question 15 options: nominal interest earnings, irrespective of their real interest earnings. real interest earnings, irrespective of their nominal interest earnings. real capital gains, irrespective of their nominal capital gains. All of the above are correct. Question 16 (1 point) Norma receives an increase in her nominal income. She complains that the current inflation rate of six percent erodes the real purchasing power of her additional nominal income. This is true Question 16 options: only if the increase in her nominal income is less than six percent. only if the increase in her nominal income is more than six percent. since inflation always reduces purchasing power. only if her real income increases. Question 17 (1 point) 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 Question 17 options: higher than she had expected, and the real value of the loan is higher than she had expected. higher than she had expected, and the real value of the loan is lower than she had expected. lower than she had expected, and the real value of the loan is higher than she had expected. lower then she had expected, and the real value of the loan is lower than she had expected. Question 18 (1 point) When deciding how much to save, people care most about Question 18 options: after-tax nominal interest rates. after-tax real interest rates. before-tax real interest rates. before-tax nominal interest rates.

Answer 1

14. A.) Is easier to impose

The inflation tax refers to the financial loss of value suffered by holders of fixed income due to effects of inflation. It is the most non- transparent of all taxes in that the way in which the tax is paid is not well understood or it is defined as penalty for holding cash at a time of high inflation. Government can just print money and distribute as it degrades economy further.Printing money to finance government expenditures imposes a tax on everyone who holds money. So government feels inflation tax is easier to impose than printing money.

15. A.) Nominal interest earnings, irrespective of their real interest earnings

In US, Taxes are imposed on net income of individuals and corporations by the federal, most state, and some local governments. Cash, securities, insurance, real estate, and business interests are among the items considered part of an estate. However, for individuals, only estates exceeding $5.34 million are taxed by the federal government. Most Americans, therefore, are exempt from paying the federal estate tax. The US income tax is charged on the nominal interest received in dollar terms, without an adjustment for inflation.

16. A.) only if the increase in her nominal income is less than six percent

Inflation can cause redistributions of purchasing power that hurt some and help others. People who are hurt by inflation include those who are holding a lot of cash, whether it is in a safe deposit box or in a cardboard box under the bed. When inflation happens, the buying power of cash is diminished. But cash is only an example of a more general problem: anyone who has financial assets invested in a way that the nominal return does not keep up with inflation will tend to suffer from inflation.

17. D.) lower then she had expected, and the real value of the loan is lower than she had expected.

Inflation and interest rates are often linked and frequently referenced in macroeconomics.Inflation refers to the rate at which prices for goods and services rise. In the United States, the interest rate, or the amount charged by lender to a borrower, is based on the federal funds rate that is determined by the Federal Reserve.According to the quantity theory of money, a growing money supply increases inflation. Thus, a low interest rate tends to result in more inflation. High interest rates tend to lower inflation.

18. B.) after-tax real interest rates

The effect of inflation is to invest your savings for a better return than you can get in money market accounts or savings accounts. Returns on stock investments generally tend to beat inflation hence they consider after tax real interest rates so that they could invest where try could save money.