2. Interest rates and the tax code: An economy begins in steady state with an investment rate of 20 percent, a corporate tax rate of 25 percent, a real interest rate of 2 percent, a depreciation rate of 7 percent, and a price of capital that falls at an annual rate of 2 percent. 1. What is the user cost of capital? 2. Suppose the central bank tightens monetary policy, raising the real interest rate from 2 percent to 4 percent. By how much does the user cost of capital rise? 3. How would your answer have differed if the corporate tax rate had been zero? Explain the effect that taxes have on the extent to which monetary policy affects the user cost of capital (and hence the investment rate).

2. Interest rates and the tax code: An economy begins in steady state with an investment rate of 20 percent, a corporate tax rate of 25 percent, a real interest rate of 2 percent, a depreciation rate of 7 percent, and a price of capital that falls at an annual rate of 2 percent. 1. What is the user cost of capital? 2. Suppose the central bank tightens monetary policy, raising the real interest rate from 2 percent to 4 percent. By how much does the user cost of capital rise? 3. How would your answer have differed if the corporate tax rate had been zero? Explain the effect that taxes have on the extent to which monetary policy affects the user cost of capital (and hence the investment rate).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would shift: a. the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right. b. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right. c. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left. d. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.
A. What is the real value of your savings if the price level increases by 10 percent for the year? B. What is the real value of your saving if the price level declines by 5 percent for the year?
28. An increase in national saving will cause real interest rate and investment spending to change in which of the following ways? A. B. C. D. E. Real Interest Rate Increase Increase Increase Decrease Decrease Nominal Interest Rate 7%³ z%¹ Sp3 Investment Increase Decrease Not change Increase Not change Sp T Q³ Q¹ D Quantity of Money
8 Demand, Supply 7 10 4 REAL INTEREST RATE (Percent) 3 2 - 10 20 30 40 50 60 70 80 QUANTITY OF LOANABLE FUNDS (Billions of dollars) Refer to Figure 33-1. If the real interest rate is 3 percent, the quantity of loanable funds demanded is $50 billion, and the quantity supplied is $30 billion. $20 billion, and the quantity supplied is $60 billion. $50 billion, and the quantity supplied is $60 billion. $30 billion, and the quantity supplied is $50 billion.
Suppose that in a closed economy, GDP is $15 trillion, Consumption is $6 trillion, Government Purchases are $5 trillion, and there is a $500 billion budget deficit. 6. What are taxes? 7. What is public saving? 8. What is private saving? 9. What is national saving? 10. What is investment? If then taxes are raised by $500 billion dollars, and the public pays for those taxes entirely by reducing their consumption (no change to their savings), after this tax increase, 11. What is consumption? 12. What are taxes? 13. What is public saving? 14. What is private saving? 15. What is national saving? 16. What is investment?
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What is the equilibrium real interest rate? The real interest rate is ____ percent a year. Screenshot attached thanks