Macroeconomics (6th Edition)
6th Edition
ISBN: 9780134106229
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 10, Problem 10.2.13PA
To determine
The effect of increasing tax rate on the equilibrium level of real interest rate and quantity demanded of loanable fund.
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Use the loanable funds market to illustrate the effect of the following events on the equilibrium. Illustrate the effects on the interest rate and quantity of investment-savings
a) The proportion of retired people in the population goes up. Think that usually retired people generally save less than working people at any interest rate.
b) At any given interest rate, consumers decide to save more (assume the budget balance is zero).
c) At any given interest rate, businesses become very optimistic about the future profitability of investment spending (assume the budget balance is zero).
The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable
funds, and the downward-sloping blue line represents the demand for loanable funds.
INTEREST RATE (Percent)
2
1
10
9
Supply
0
0
100
Demand
200 300 400 500 600 700 800 900 1000
LOANABLE FUNDS (Billions of dollars)
?
Investment is the source of the demand for loanable funds. As the interest rate rises, the quantity of loanable funds
demanded decreases
Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is
demanded, resulting in a shortage of loanable funds. This would encourage lenders to raise the interest rates they charge, thereby
the quantity of loanable funds supplied and
the equilibrium interest rate of
%
less
than the quantity of loans
the quantity of loanable funds demanded, moving the market toward
This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving.
The following graph shows the market for loanable funds.
Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both.
A tax law change that successfully encourages saving will (increase/decrease) interest rates, which leads to (less/more) investment and economic growth.
To better understand how changes in tax laws can affect saving, suppose that Madison, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Madison's parents are so impressed with her plans that they offer to pay her an additional 30% interest per month on the money she saves, which means that Madison is now earning a large rate of return on her saving. By the end of the…
Chapter 10 Solutions
Macroeconomics (6th Edition)
Ch. 10 - Prob. 10.1.1RQCh. 10 - Prob. 10.1.2RQCh. 10 - Prob. 10.1.3RQCh. 10 - Prob. 10.1.4RQCh. 10 - Prob. 10.1.5PACh. 10 - Prob. 10.1.6PACh. 10 - Prob. 10.1.7PACh. 10 - Prob. 10.1.8PACh. 10 - Prob. 10.1.9PACh. 10 - Prob. 10.1.10PA
Ch. 10 - Prob. 10.1.11PACh. 10 - Prob. 10.1.12PACh. 10 - Prob. 10.1.13PACh. 10 - Prob. 10.1.14PACh. 10 - Prob. 10.2.1RQCh. 10 - Prob. 10.2.2RQCh. 10 - Prob. 10.2.3RQCh. 10 - Prob. 10.2.4RQCh. 10 - Prob. 10.2.5PACh. 10 - Prob. 10.2.6PACh. 10 - Prob. 10.2.7PACh. 10 - Prob. 10.2.8PACh. 10 - Prob. 10.2.9PACh. 10 - Prob. 10.2.10PACh. 10 - Prob. 10.2.11PACh. 10 - Prob. 10.2.12PACh. 10 - Prob. 10.2.13PACh. 10 - Prob. 10.2.14PACh. 10 - Prob. 10.2.15PACh. 10 - Prob. 10.2.16PACh. 10 - Prob. 10.2.17PACh. 10 - Prob. 10.3.1RQCh. 10 - Prob. 10.3.2RQCh. 10 - Prob. 10.3.3RQCh. 10 - Prob. 10.3.4PACh. 10 - Prob. 10.3.5PACh. 10 - Prob. 10.3.6PACh. 10 - Prob. 10.3.7PACh. 10 - Prob. 10.3.8PACh. 10 - Prob. 10.3.9PACh. 10 - Prob. 10.3.10PACh. 10 - Prob. 10.1RDECh. 10 - Prob. 10.2RDECh. 10 - Prob. 10.3RDE
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Similar questions
- The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. NOTE: the options for the first dropdown question is (investment or saving), the options for the second dropdown question is (decreases or increases), the options for the third dropdown question is (greater or less), the options for the fourth dropdown question is (surplus or shortage), the options for the fifth dropdown question is (raise or lower), the options for the sixth dropdown question is (increasing or drecreasing), and the options for the seventh dropdown question is also (increasing or decreasing)arrow_forwardThe following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. (Graph in image) (a. Saving, b. Investment) is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied (a. increases, b. decreases). Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is (a. greater, b. less) than the quantity of loans demanded, resulting in a (a. surplus, b. shortage) of loanable funds. This would encourage lenders to (a. raise, b. lower) the interest rates they charge, thereby (a. increasing, b. decreasing) the quantity of loanable funds supplied and (a. increasing, b. decreasing) the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of ____ %.arrow_forwardHow does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?arrow_forward
- 3.3 Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. 3.4 Explain and show graphically how an increase in expected profits from firm investment projects affects the equilibrium interest rate and the equilibrium quantity of loanable funds. 3.5 Explain and show graphically how an increase in government spending (i.e. budget deficit) affects the equilibrium interest rate in the market for loanable funds.arrow_forwardThe graph characterizes a market for loanable funds. Shift the appropriate curves to indicate what will happen to the market if the government grants a new corporate tax credit for business investment. (Look at image) After this change, the real interest rate decreases and the quantity of loanable funds increases. the real interest rate decreases and the quantity of loanable funds decreases. the real interest rate increases and the quantity of loanable funds decreases. the real interest rate increases and the quantity of loanable funds increases.arrow_forwardAccording to how we model the Loanable Funds market in Ch. 6 (considering household savings and taking (T – G) as government’s net ‘saving,’ which could be negative it there were a budget deficit), which of the following shifts the Supply of Loanable Funds curve to the left? (T = taxes; G = government spending.) Group of answer choices A) higher tax rates on business investment spending B) a change in tastes toward consuming less C) higher budget deficit D) change in tastes toward saving more E) lower budget deficitarrow_forward
- The following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. INTEREST RATE (Percent) 10 9 8 50 3 2 1 0 Supply Demand 0 100 200 300 400 500 600 700 800 900 1000 LOANABLE FUNDS (Billions of dollars) ? is the source of the supply of loanable funds. As the interest rate rises, the quantity of loanable funds supplied Suppose the interest rate is 4.5%. Based on the previous graph, the quantity of loanable funds supplied is demanded, resulting in a of loanable funds. This would encourage lenders to the quantity of loanable funds supplied and the equilibrium interest rate of % than the quantity of loans the interest rates they charge, thereby the quantity of loanable funds demanded, moving the market towardarrow_forwardDraw a correctly labeled graph of the loanable funds market showing the equilibrium real interest rate and the equilibrium quantity of loanable funds.arrow_forwardUsing a graph representing the market for loanable funds, show and explain what happens to interest rates and investment if: a reduction in military spending moves the government’s budget from deficit into surplus.arrow_forward
- 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. (graph in image) 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 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease). Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases…arrow_forwardThe following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. Supply 5 Demand 1 100 200 300 400 500 600 LOANABLE FUNDS (Billions of dollars) is the source of the supply of loanable funds. As the interest rate falls, the quantity of loanable funds supplied Suppose the interest rate is 3.5%. Based on the previous graph, the quantity of loanable funds supplied is than the quantity of loans ▼ of loanable funds. This would encourage lenders to the interest rates they charge, thereby demanded, resulting in a the quantity of loanable funds supplied and the quantity of loanable funds demanded, moving the market toward 0% the equilibrium interest rate of INTEREST RATE (Percent)arrow_forwardIn the graph you've just made, how does a tax on interest income influence the real interest rate and investment? A tax on interest income _______ loanable funds, which _______ the real interest rate and _______ investment. A. decreases the demand for; raises; decreases B. decreases the supply of; raises; decreases C. increases the supply of; lowers; increases D. increases the demand for; lowers; increases Screenshot attached thanksarrow_forward
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