12. Inflation-induced tax distortions Bob receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Bob's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) (Percent) (Percent) 2.0 4.5 8.5 4.5 Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes the quantity of investment in the economy and nominal interest income. This tends to the economy's long-run growth rate. saving, thereby

12. Inflation-induced tax distortions Bob receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Bob's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate (Percent) After-Tax Nominal Interest Rate (Percent) After-Tax Real Interest Rate (Percent) (Percent) (Percent) 2.0 4.5 8.5 4.5 Compared with lower inflation rates, a higher inflation rate will the after-tax real interest rate when the government taxes the quantity of investment in the economy and nominal interest income. This tends to the economy's long-run growth rate. saving, thereby

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on savings accounts is 13% per year, and both actual and expected inflation are equal to 2%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 13 13 Expected Inflation (Percent) 2 2 Actual Inflation (Percent) 2 10 The unanticipated change in inflation arbitrarily benefits Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 2% to 10% per year. Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in the money supply (MS). Now consider the long-run impact…
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8. Inflation-induced tax distortions Musashi receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Musashi's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 7.0 4.5 the after-tax real interest rate when the government taxes Compared with higher inflation rates, a lower inflation rate will the quantity of investment in the…
12. Inflation-induced tax distortions Ashwin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Ashwin's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.5 4.5 7.0 4.5 Compared with higher inflation rates, a lower inflation rate will nominal interest income. This tends to ▼saving, thereby the economy's long-run growth rate. After-Tax Real Interest Rate (Percent) the…
Question Suppose the Fed tries to prevent the increased government demand for loanable funds from raising interest rates by increasing the supply of loanable funds through and expansion of commercial bank loans. Will this Fed policy succeed in preventing interest rates from rising? At what point will the Fed's expansionary policy step up the inflation rate? How will the expectation of a higher rate of inflation cause interest rates to rise?
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John has nominal wealth of $100,000. He wants to invest his wealth in money (a chequing account) and government bonds such that he invests $50,000 in bonds and $5,000 more in bonds for every percentage point that the interest rate on bonds (i) exceeds that interest rate on his chequing account (i"). 1. Derive an algebraic formula that describes John's nominal demand for bonds (B°)? 2. Derive an algebraic formula to describe John's nominal demand for money (Mª) as a function of bonds and the interest rate on the chequing account. 3. Solve for the sum of John's nominal demand for money and nominal demand for bonds. 4. Suppose that John is a representative consumer of all individuals in the economy, that the fixed asset supplies per person are $80,000 of bonds and $20,000 of chequing accounts, and the chequing accounts do not pay interest. What is the interest rate on bonds at asset market equilibrium? a. Solve using the money market condition. b. Solve using the asset market condition.…
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