INTEREST RATE (Percent) Supply LOANABLE FUNDS (Billions of dollars) Demand 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 an increase in the tax rate on interest income, from 18% to 22%. 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 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 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 to 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 national saving. and the level of saving Shift the appropriate curve on the graph to reflect this change. which
INTEREST RATE (Percent) Supply LOANABLE FUNDS (Billions of dollars) Demand 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 an increase in the tax rate on interest income, from 18% to 22%. 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 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 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 to 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 national saving. and the level of saving Shift the appropriate curve on the graph to reflect this change. which
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:### Understanding the Loanable Funds Market
#### Graph Explanation
The graph depicts the market for loanable funds, plotting the interest rate (percent) on the vertical axis against loanable funds (billions of dollars) on the horizontal axis. It features two curves:
- **Demand Curve**: Downward sloping, showing the relationship between the interest rate and the quantity of loanable funds demanded.
- **Supply Curve**: Upward sloping, illustrating the relationship between the interest rate and the quantity of loanable funds supplied.
The equilibrium is where the supply and demand curves intersect.
#### Scenarios
**Scenario 1: Increased Tax on Interest Income**
- **Situation**: Savers either buy bonds or deposit in bank savings accounts. The initial tax rate on interest income is 18%, which increases to 22%.
- **Graph Adjustment**: The supply curve should shift left.
- **Impact**: This change raises the equilibrium interest rate and lowers the level of investment spending.
**Scenario 2: Implementation of an Investment Tax Credit**
- **Situation**: The government introduces an investment tax credit, reducing the tax liability for firms purchasing new capital.
- **Graph Adjustment**: The demand curve should shift right.
- **Impact**: This change results in a higher interest rate and increases the level of saving.
**Scenario 3: Increased Government Spending**
- **Situation**: The government budget shifts from balanced to increased spending on national defense without changing taxes.
- **Graph Adjustment**: The supply curve should shift left.
- **Impact**: This causes the government to run a budget deficit, lowering national saving. Consequently, the interest rate increases, reducing the level of investment spending.
These scenarios illustrate how taxes, government policies, and spending can influence the loanable funds market through shifts in supply and demand, affecting interest rates and investment.
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