Answer to Question #50610 in Microeconomics for IGA

Question

Explain. Use graphs when appropriate.

Suppose the tax rate on the first $20,000 of income is 20%, and on any income above that is 25%. This tax is progressive. [Hint: Consider two taxpayer, one earning $20,000, and the other $40,000.]

The direct and excess burdens from an excise tax are greater the less elastic is demand in the market. [Hint: Assume perfectly elastic supply.]

Recently, the yield (annual nominal interest rate) on government 10 year bonds was 1.67% in Canada and 1.97% in the US. If we ignore any potential exchange rate changes and assume that bond traders ensure equal real interest rates in the two countries, then we can expect annual inflation to be 0.30% higher in the US over the next ten years.

Assuming that exchange rates are consistent across currencies, then if the Canadian dollar exchange rate with the US dollar and the US dollar exchange rate with the Euro are both equal to 1.18, then the Canadian dollar exchange rate with the Euro is equal to 1.00.

Answer 1

Suppose the tax rate on the first $20,000 of income is 20%, and on any income above that is 25%. This tax is progressive, because
the higher is income, the higher is tax rate. So, the statement is true.
The direct and excess burdens from an excise tax are greater the less elastic is demand in the market. If the supply is
perfectly elastic, this statement is true.
Recently, the yield (annual nominal interest rate) on government 10 year bonds was 1.67% in Canada and 1.97% in the US. If we
ignore any potential exchange rate changes and assume that bond traders
ensure equal real interest rates in the two countries, then we can
expect annual inflation to be 0.30% higher in the US over the next ten
years, because the yield in the US is higher. So, the statement is true.
Assuming that exchange rates are consistent across currencies, then if the Canadian dollar exchange rate with the US dollar
and the US dollar exchange rate with the Euro are both equal to 1.18,
then the Canadian dollar exchange rate with the Euro is equal to
1.18*1.18 = 1.3924. So, the statement is false.