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 spending to and the level of investment 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 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 and the level of saving to Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending 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. the level of investment spending. This causes the interest rate to
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 spending to and the level of investment 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 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 and the level of saving to Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending 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. the level of investment spending. This causes the interest rate to
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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 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
spending to
and the level of investment
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 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
and the level of saving to
Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense
spending without changing taxes.
, which
national saving.
This change in spending causes the government to run a budget
Shift the appropriate curve on the graph to reflect this change.
the level of investment spending.
This causes the interest rate to
Transcribed Image Text:4. 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.)
Demand
Supply
1
INTEREST RATE (Percent)
Demand
LOANABLE FUNDS (Billions of dollars)
Supply
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