Question

Suppose next year you start a new job with a starting salary of $50,000 and no non-human wealth. If you expect your salary to increase by 5 percent in real terms for the next 3 years, the real interest rate is 0 percent and the income tax rate is 30 percent. How much should you spend each year (for the next three years) to maintain a constant level of consumption. (It is also implicitly assumed that consumption beyond the 3 year period has no value.) Provide an answer to the nearest whole dollar.

Answer 1

1st year

salary = 50,000*12= 6,00,000$

tax @30% = 1,80,000$

1st year expenditure will be : 6,00,000-1,80,000

= 4,20,000$

2nd Year

salary increased by 5%

Total salary will be

6,00,000*105%

6,30,000$

total tax@30% = 1,89,000$

total expense for the second year will be

6,30,000-1,89,000

4,41,000$

3rd year

Total salary will be

6,30,000*105%

6,61,500$

Tax @30% = 6,61,500*30%

1,98,450$

total expense for the 3rd year will be

6,61,500-1,98,450

4,63,050$.