Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to fall and the level of investment spending to increase Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to fall and the level of investment to rise Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defer spending without changing taxes. This change in spending causes the government to run a budget surplus , which increases national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to fall increasing the level of investment spending.
Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to fall and the level of investment spending to increase Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to fall and the level of investment to rise Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defer spending without changing taxes. This change in spending causes the government to run a budget surplus , which increases national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to fall increasing the level of investment spending.
Chapter21: Financial Markets, Saving, And Investment
Section: Chapter Questions
Problem 6P
Related questions
Question
Transcribed Image Text:Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to
fall
and the level of
investment spending to increase
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the
government implements a new investment tax credit.
Shift the appropriate curve on the graph to reflect this change.
The implementation of the new tax credit causes the interest rate to fall
and the level of investment to rise
Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defens
spending without changing taxes.
This change in spending causes the government to run a budget surplus
which increases
national saving.
Shift the appropriate curve on the graph to reflect this change.
This causes the interest rate to
fall
increasing
the level of investment spending.
Transcribed Image Text:5. The market for loanable funds and government policy
The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you
complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each
individual scenario. (Note: You will not be graded on any changes you make to the graph.)
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Supply
Demand
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual
contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year.
INTEREST RATE (Percent)
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