Use the following information to answer question 4.11. Assume Tony is a money le

Question

Use the following information to answer question 4.11. Assume Tony is a money lender Suppose Betly cbtains a loan from Tony to at a given intorest rate. that Betty is a 4.11. Which one of the following statements is correct? a. If the intorest rate is groster than he inlation rate, then Tony wil be worse of hen b. If the intorest rate is c If the inflation rate is lower than the interest rate, Botty lower than the infilation rate, then Betty will be worse off then T ony Tany will receive a higher compensation for his income [11 c. 12] b. 14] (4] a and c a and b 4.12. Due to inflation, an increase in nominal wages will cause. [1) the real incomes to rise. [2) the average rates of personal income tax to decrease. 13) the average rates of personal income tax to increase. 141 no change in the average rates of personal income tax.

Explanation / Answer

4.11) statement c is correct - if inflation rate < interest rate, Tony will receive a higher compensation for his income (real interest rate = nominal rate - inflation rate, he will earn a positive real interest rate)

4.12) The average rate of personal income tax would increase (tax burden would increase owing to progressive tax rates and income falling in higher tax brackets)

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