2 Question For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate (in the textbook the authors refer to the "neutral real interest rate"), national saving and investment. Show all your diagrams. a) Parliament passes a 10% investment tax credit. Under this program, for every $100 that a firm spends on new capital equipment, it receives an extra $10 in tax refunds from the government. b) A reduction in military spending moves the government's budget from deficit into surplus. c) A new generation of computer-controlled machines becomes available. These machines produce manufactured goods much more quickly and with fewer de- fects. d) The government raises its tax on corporate profits. Other tax changes are also made, such that the government's deficit remains unchanged. e) Concerns about job security raise precautionary saving. f) New environmental regulations increase firms' costs of operating capital.
2 Question For each of the following scenarios, use supply and demand analysis to predict the resulting changes in the real interest rate (in the textbook the authors refer to the "neutral real interest rate"), national saving and investment. Show all your diagrams. a) Parliament passes a 10% investment tax credit. Under this program, for every $100 that a firm spends on new capital equipment, it receives an extra $10 in tax refunds from the government. b) A reduction in military spending moves the government's budget from deficit into surplus. c) A new generation of computer-controlled machines becomes available. These machines produce manufactured goods much more quickly and with fewer de- fects. d) The government raises its tax on corporate profits. Other tax changes are also made, such that the government's deficit remains unchanged. e) Concerns about job security raise precautionary saving. f) New environmental regulations increase firms' costs of operating capital.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
For each of the following scenarios, use supply and demand analysis to predict the
resulting changes in the real interest rate (in the textbook the authors refer to the
"neutral real interest rate"), national saving and investment. Show all your diagrams.
a) Parliament passes a 10% investment tax credit. Under this program, for every
$100 that a firm spends on new capital equipment, it receives an extra $10 in
tax refunds from the government.
b) A reduction in military spending moves the government's budget from deficit
into surplus.
c) A new generation of computer-controlled machines becomes available. These
machines produce manufactured goods much more quickly and with fewer de-
fects.
d) The government raises its tax on corporate profits. Other tax changes are also
made, such that the government's deficit remains unchanged.
e) Concerns about job security raise precautionary saving.
f) New environmental regulations increase firms' costs of operating capital.
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