5. The market for loanable funds and government policy The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Supply Demand LOANABLE FUNDS (Billions of dollars) Demand. Supply

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5. The market for loanable funds and government policy
The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete
the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next.
(Note: You will not be graded on any changes you make to the graph.)
INTEREST RATE (Percent)
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
Demand
Supply
(?
Transcribed Image Text:5. The market for loanable funds and government policy The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) INTEREST RATE (Percent) Supply Demand LOANABLE FUNDS (Billions of dollars) 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 a decrease in the tax rate on interest income, from 18% to 14%.
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
spending to
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some 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
This change in spending causes the government to run a budget
Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing
taxes.
Shift the appropriate curve on the graph to reflect this change.
and the level of saving to
This causes the interest rate to
which
and the level of investment
the level of investment spending.
national saving.
Transcribed Image Text: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 a decrease in the tax rate on interest income, from 18% to 14%. 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 spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some 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 This change in spending causes the government to run a budget Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. Shift the appropriate curve on the graph to reflect this change. and the level of saving to This causes the interest rate to which and the level of investment the level of investment spending. national saving.
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