Question 1

Which is a retirement savings account specifically designed for the self-employed,under which up to a set amount can be saved each year on a tax-free basis?

Accepted Answer

The Keogh account is specifically designed for the self-employed and allows for tax-free savings up to a set amount each year. The other options listed (defined contribution pension plan, Roth IRA, and 401(k) account) may be available for the self-employed, but they are not designed specifically for this group and may have different contribution limits and tax implications.

Question 2

Which statement regarding tax-subsidized saving for retirement is TRUE?

Accepted Answer

The income effect of tax subsidies for saving can lead individuals to save less because they feel wealthier due to the tax break, potentially reducing the need to save as much.

Question 3

Which of the following is an employer-sponsored plan through which workers accrue certain rights during their tenure at the firm and on retirement are paid a benefit by the firm that is based on tenure at the firm and employee earnings?

Accepted Answer

A defined benefit pension plan is the type of employer-sponsored plan where workers accrue certain rights during their tenure at the firm and on retirement are paid a benefit by the firm that is based on tenure at the firm and employee earnings. Option A (defined contribution pension plan) refers to a plan where the employer or employee (or both) contribute to an account, which is then invested, and the eventual benefit received by the employee depends on the return on those investments. Options C and D (Keogh account and 401(k) account) are both retirement savings accounts, but they are not employer-sponsored plans in the same way that a defined benefit pension plan is.

Question 4

Suppose an Individual Retirement Account (IRA)has a contribution limit of $3,000 per year and that prior to the passage of the law establishing IRAs,Carlos was saving $2,500 per year.After the IRAs were established,Carlos saved $2,000 per year.Which statement is TRUE?

Accepted Answer

Since Carlos was already saving $2,500 before the IRA was established, the tax subsidy had an inframarginal effect on his saving, meaning it did not directly influence his decision to save. Instead, the IRA likely provided further encouragement and convenience for him to continue saving at a slightly reduced rate of $2,000 per year. This is consistent with the fact that his savings did not decrease significantly after the IRAs were established.

Question 5

Which statement reflects a prediction of the precautionary saving model and the empirical evidence?

Accepted Answer

The precautionary saving model predicts that when social insurance programs expand, individuals feel more financially secure and thus reduce their savings, which is supported by empirical evidence.

Question 6

Which of the following best describes liquidity constraints?

Accepted Answer

The answer of Which of the following best describes liquidity...

Question 7

How does the precautionary saving model differ from the intertemporal choice model of saving? Discuss the importance of the functioning of credit markets with respect to the precautionary saving model.

Accepted Answer

The answer of How does the precautionary saving model differ...

Question 8

Suppose an Individual Retirement Account (IRA)has a contribution limit of $3,000 per year and that prior to the passage of the law establishing IRAs,Hamilton was not saving any of his income.After IRAs became available,Hamilton saved $2,000 per year.Which statement is TRUE?

Accepted Answer

The tax subsidy in the IRA had a marginal effect on Hamilton's saving because it caused him to save more than he would have without the subsidy.

Question 9

Which of the following is a tax-preferred retirement savings vehicle primarily for low- and middle-income taxpayers in which the taxpayers make pretax contributions and are then taxed on future withdrawals?

Accepted Answer

A traditional Individual Retirement Account (IRA) is a tax-preferred retirement savings vehicle primarily for low- and middle-income taxpayers. Taxpayers can make pretax contributions and are taxed on future withdrawals. The other options, such as defined contribution and defined benefit pension plans, and a 401(k) account, have different tax and contribution structures.

Question 10

Jesse earns income equal to $82,000 in the first period,but his income will drop to $19,170 in the second period.
(a)Sketch his intertemporal budget constraint,assuming a 6.5% rate of interest.Add an indifference curve that assumes he optimally chooses to save $40,000 in the first period.
(b)Show the effect of a 50% tax on interest income,assuming the substitution and income effects cancel each other out.

Accepted Answer

The answer of Jesse earns income equal to $82,000 in...

Question 11

Which of the following is NOT one of the four major tax incentives for retirement savings?

Accepted Answer

Precautionary saving is not a tax incentive for retirement savings. The other three options (defined contribution pension plan, simplified employee pension plan, and 401(k) account) are all tax-advantaged retirement savings options.

Question 12

Which of the following is a tax-preferred retirement savings vehicle primarily for low- and middle-income taxpayers in which the taxpayers make after-tax contributions but then make tax-free withdrawals later in life?

Accepted Answer

The Roth IRA is a tax-preferred retirement savings vehicle primarily for low- and middle-income taxpayers. Taxpayers make after-tax contributions but then make tax-free withdrawals later in life. The other options listed (defined contribution pension plan, Keogh account, and 401(k) account) have different tax treatments and may not be primarily targeted at low- and middle-income taxpayers.

Question 13

What is a tax-preferred retirement savings vehicle offered by employers to which the employers often match part or all of employees' contributions?

Accepted Answer

A 401(k) account is a tax-preferred retirement savings vehicle offered by employers to which employers often match part or all of employees' contributions. Defined contribution and defined benefit pension plans are also retirement savings options, but they are not as prevalent as 401(k) plans. Social Security is a government-administered retirement savings program and is not directly offered by employers.

Question 14

What four initiatives did President Obama introduce to help Americans save? What are common criticisms of the initiatives?

Accepted Answer

The answer of What four initiatives did President Obama introduce...

Question 15

What is an employer-sponsored plan in which the employer sets aside a certain proportion of a worker's earnings in an investment account,which the worker will receive with investment earnings at retirement?

Accepted Answer

A defined contribution pension plan is an employer-sponsored retirement plan where the employer contributes a certain amount or percentage of the employee's earnings to an investment account. The amount contributed is defined, but the benefits received at retirement depend on the investment earnings accrued. This type of plan is more common than defined benefit pensions because it shifts the investment risk from the employer to the employee.

Question 16

Suppose an Individual Retirement Account (IRA)has a contribution limit of $4,000 per year and that prior to the passage of the law establishing IRAs,Rachel was saving $5,500 per year.Which of the following is the most likely effect?

Accepted Answer

The tax subsidy in the IRA will have an inframarginal effect on Rachel's saving because she was already saving more than the IRA limit before the law was passed, indicating that the tax benefits apply to savings she would have made anyway.

Question 17

Suppose that the government proposes to eliminate unemployment insurance.Which model,the intertemporal choice model of saving or the precautionary saving model,would predict the larger change in savings in consequence? Explain your answer and be sure to note any empirical evidence that might be relevant.

Accepted Answer

The answer of Suppose that the government proposes to eliminate...

Question 18

A model of savings that accounts for the fact that individual savings serve to smooth consumption over future uncertainties can be defined as a(n):

Accepted Answer

The concept of smoothing consumption over future uncertainties is central to the precautionary savings model. This model accounts for the fact that individuals save as a way to protect themselves against unforeseen events such as job loss or illness, and thus helps them manage their future consumption more effectively. The other options (B, C, and D) do not fully capture this aspect of savings behavior.

Question 19

Saving money in a retirement account with many withdrawal restrictions at an interest rate of 5% while simultaneously borrowing money at 10% is consistent with the:

Accepted Answer

The self-control model of saving explains this behavior by suggesting that individuals might save in a restricted account to prevent themselves from spending too much, even if it means borrowing at a higher interest rate for immediate needs. This model highlights the struggle between present and future consumption and the use of commitment devices (like retirement accounts with withdrawal restrictions) to enforce saving.

Question 20

Which statement is TRUE?

Accepted Answer

The precautionary saving model assumes that individuals save in order to self-insure against unexpected income shocks or expenses. The intertemporal choice model, on the other hand, assumes that individuals save in order to smooth their consumption over time, taking into account future income and interest rates. Therefore, statement B is true: the precautionary saving model assumes that some saving is motivated by a desire to self-insure against risk.

Quiz 22: Taxes on Savings