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Handout 12

# Handout 12 - (a Suppose that nominal GDP is \$1 billion and...

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Econ 3140-2 Fall 2009 Handout #12 1. (Question Four from Abel et.al., Chapter 15, numerical problems) Suppose that the income tax law exempts income of less than \$8 ; 000 from the tax, taxes income between \$8 ; 000 and \$20 ; 000 at a 25% , and taxes income greater than \$20 ; 000 at a 30% rate. (a) Find the average tax rate and the marginal tax rate for someone earning \$16 ; 000 and for someone earning \$30 ; 000 . (b) The tax law is changed so that income of less than \$6 ; 000 is untaxed, income from \$6 ; 000 to \$20 ; 000 is taxed at 20% and income of more than \$20 ; 000 continue to be taxed at 30% . Repeat Part ( a ) . (c) How will the tax law change in Part ( b ) a/ect the labor supply of the person initially making \$16 ; 000 ? How will it a/ect the labor supply of the person making \$30 ; 000 ? 2. (Question Seven from Abel et.al., Chapter 15, numerical problems) By issuing new bonds and using the proceeds to pay the interest on its old bonds, can government avoid ever repaying its debts?
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Unformatted text preview: (a) Suppose that nominal GDP is \$1 billion and the government has \$100 million of bonds outstanding. The bonds are one-year bonds that pay a 7% nominal interest rate. The growth rate of nominal GDP is 5% per year. Beginning now the government runs a zero primary de&cit forever and pays interest on its existing debt by issuing new bonds. What is the current debt-GDP ratio? What will this ratio be after 1 , 2 , 5 , and 10 years? Suppose that, if the debt-GDP ratio exceeds 10 , the public refuses to buy additional government bonds. Will the debt-GDP ratio ever reach that level? Will the government someday have to run a primary surplus to repay its debts, or can it avoid repayment forever? Why? (b) Repeat Part ( a ) for nominal GDP growth of 8% per year and a nominal interest rate on government bonds of 7% per year. 1...
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