INTEREST RATE (Percent)DemandLOANABLE FUNDS (Billions of dollars)SupplyDemandSupply?Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or depositsis taxed at a rate of 18%. Now suppose there is an increase in the tax rate on interest income, from 18% to 22%. Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Supposethe government repeals a previously existing investment tax credit.Shift the appropriate curve on the graph to reflect this change.The repeal of the previously existing tax credit causes the interest rate toScenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defensespending without changing taxes.This change in spending causes the government to run a budgetShift the appropriate curve on the graph to reflect this change.This causes the interest rate toand the level of saving toIwhichthe level of investment spending.national saving.

The government provides tax credits to consumers or businesses to help them pay less in taxes. Tax…

INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Demand. Supply ? Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 18%. Now suppose there is an increase in the tax rate on interest income, from 18% to 22%.

INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Demand. Supply ? Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 18%. Now suppose there is an increase in the tax rate on interest income, from 18% to 22%.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 8PA

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9 Suppose the government borrows $7 billion more next year than this year (for example, they move from a balanced budget to a $7 billion deficit or from a $10 billion deficit to a $17 billion deficit). a Use a supply-and-demand diagram to analyse this policy. What happens to the interest rate? b What happens to investment? To private saving? To public saving? To national saving? Compare the size of the equilibrium changes with the $7 billion of extra borrowing. Is it the same, less or more? Carefully explain why and distinguish the various movements in the diagram. C How do the elasticities of supply of and demand for loanable funds (i.e. the slopes of the curves) affect the size of these changes? (Hint: See chapter 2 to review the definition of elasticity.) d Suppose households believe that greater government saving today implies lower future taxes since there will be little government debt. What does this belief do to private saving and the supply of loanable funds today? Does it…
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