5. The market for loanable funds and government policy 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 oriqinal state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.) (?) Supply Demand Supply Demand LOANABLE FUNDS (Billions of dollars) 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 a decrease in the tax rate on interest income, from 20% to 15%. 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 v and the level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the 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 to ▼ and the level of investment to v Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget , which national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to v the level of investment spending. INTEREST RATE (Percent)
5. The market for loanable funds and government policy 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 oriqinal state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.) (?) Supply Demand Supply Demand LOANABLE FUNDS (Billions of dollars) 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 a decrease in the tax rate on interest income, from 20% to 15%. 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 v and the level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the 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 to ▼ and the level of investment to v Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget , which national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to v the level of investment spending. INTEREST RATE (Percent)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:5. The market for loanable funds and government policy
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 oriqinal state before examining the effect of each
individual scenario. (Note: You will not be graded on any changes you make to the graph.)
(?)
Supply
Demand
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
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 a decrease in the tax rate on interest income, from 20% to 15%.
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 v and the level of investment
spending to
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the
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 to ▼ and the level of investment to v
Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing
taxes.
This change in spending causes the government to run a budget
, which
national saving.
Shift the appropriate curve on the graph to reflect this change.
This causes the interest rate to
v the level of investment spending.
INTEREST RATE (Percent)
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