The country of Lessidinia has a tax system identical to that of the United States.Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency)in 1960 when the price index equaled 100.In 2002,the person sold the land for 100,000 foci,and the price index equaled 600.The tax rate on nominal gains was 20 percent.Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain.
A)-60 percent
B)-30 percent
C)30 percent
D)60 percent

Question

Quizplus · Accepted Answer

The nominal gain is calculated as (sale price - purchase price) = (100,000 - 20,000) = 80,000 foci. The inflation rate from 1960 to 2002 can be calculated as (600 - 100)/100 = 5, and the real purchase price in 2002 prices can be calculated as (20,000 x 5) = 100,000 foci. Therefore, the real gain is (100,000 - 100,000) = 0 foci. 
The taxes on the nominal gain are (0.2 x 80,000) = 16,000 foci. 
The after-tax real rate of capital gain is ((100,000 - 16,000) - 100,000)/100,000 = -0.16, or -16 percent. 
Therefore, the correct choice is B, -30 percent.

The Country of Lessidinia Has a Tax System Identical to That