which of the following are methods used by the A household i

A household is planning to deposit $10,000. into one of the following two savings accounts. Which of the following two savings accounts would have the greater balance after 25 years? How much money would be in these accounts after 25 years? Option A is a tax free account that pays 7% interest per year. Option B pays 8% interest per year and the interest is subject to the income tax. The tax bracket for this household is 25%. Use the loanable funds model to explain what would happen to private savings, private investment spending and the rate of interest if the following events occur. Assume the government has a balanced budget prior to occurrence of each event, Use a separate graph for each event. Government increases the income tax rate on the interest earned on savings accounts. Government announces that Social Security benefits will be reduced by 50% for all people born alter 1990. Government increases its spending on education by $20 billion and does not increase taxes to pay for the increase in spending.

Solution

Q1

Ans:

Option A\'s FV
=P(1+i)^n
=10000(1.07^25)
=54274.3264
Option B\'s FV
Finding after tax rate
=Interest rate* (1-Tax rate)
=0.08*0.75=0.06
FV=10000(1.06^25)
=42918.7071974
so the household will choose option A