Answered: Scenario 1: Individual Retirement…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 original state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.)

Scenario 1: Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is a decrease in the maximum contribution, from $5,000 to $3,000 per year.

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 ______ (fall/ rise) and the level of investment spending to _____ ( decrease/increase).

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 _____ (fall/rise) and the level of saving to _____(fall/rise).

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 _____(deficit/surplus), which _____(decrease/increase) national saving.

Shift the appropriate curve on the graph to reflect this change.

This causes the interest rate to ______(fall/rise), ______(crowding out/increasing) the level of investment spending.

Note:- Tell the answer to the graph (the graph is in the image) whether the demand or supply is increasing or falling or remaining constant. Also, everything written in bold handwriting is the options for the question. So please give all the correct answers to this problem.

Demand
Supply
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
INTEREST RATE (Percent)

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