The nominal interest rate on taxable bonds is 8%, while on municipal bonds (which aren't taxable) it is 5%. The expected inflation rate is 3% and the tax rate on interest income is 40%. Calculate the expected real after-tax interest rate on both bonds. Which would be the better investment? Now suppose the actual inflation rate turned out to be 6%. Which bond was the better investment? Would your answer change if inflation had turned out to be 0%?
What will be an ideal response?
ra-t (taxable bond) = (1 - 0.40)8% - 3% = 1.8%; ra-t (municipal bond) = 5% - 3% = 2%; municipal bond is the best buy; note that the same expected inflation rate is subtracted from both, so it doesn't matter what the actual inflation rate turns out to be the municipal bond is always the best.
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If the government uses its budget surplus to finance additional government purchases or tax cuts, crowding out will
A. not occur. B. occur to a greater degree. C. still occur, but to a lesser degree. D. occur more rapidly.
Which of the following would decrease the natural rate of unemployment?
A) a decrease in government-sponsored programs that train unemployed workers so they can find new jobs quickly B) an increase in the generosity of unemployment insurance programs C) fewer restrictions on unions to negotiate wage changes with companies D) a decrease in the number of younger, less skilled workers in the economy
What impact do tax rebates have?
What will be an ideal response?
Total Variable Cost (TVC)
What will be an ideal response?