-Refer to Figure 20.3.Suppose the equation that equates excess burden to the tax rate can be written as EB = t2,where EB is excess burden and t is the tax rate.
(A)Suppose the tax rate t is initially 12 percent.How much excess burden is generated?
(B)If the tax rate doubles to 24 percent,what happens to excess burden?
Definitions:
Nominal Interest Rates
Interest rates that have not been adjusted for inflation, reflecting the rate of interest paid by borrowers or earned by investors.
Pure Discount Securities
Financial instruments that are sold at a discount from their face value and pay no interest until maturity, such as zero-coupon bonds.
Clean Price
The price of a bond excluding any interest that has accrued since issue or during the last coupon payment.
Dirty Price
The price of a bond that includes accrued interest, in contrast to the clean price which excludes it.
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