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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 fall and the level of investment spending to 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 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 fall and the level of investment to rise Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defer spending without changing taxes. This change in spending causes the government to run a budget surplus , which increases national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to fall increasing the level of investment spending.

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 fall and the level of investment spending to 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 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 fall and the level of investment to rise Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defer spending without changing taxes. This change in spending causes the government to run a budget surplus , which increases national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to fall increasing the level of investment spending.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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### Transcription for Educational Website #### Scenario Analysis on Loanable Funds Market ##### Scenario 1: - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** A change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to **fall**, and the level of investment spending to **increase**. ##### Scenario 2: - **Context:** An investment tax credit effectively lowers the tax bill for any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** The implementation of the new tax credit causes the interest rate to **fall** and the level of investment to **rise**. ##### Scenario 3: - **Context:** Initially, the government's budget is balanced; the government then responds to the conclusion of a war by significantly reducing defense spending without changing taxes. - **Outcome:** This change in spending causes the government to run a budget **surplus**, which **increases** national saving. - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** This causes the interest rate to **fall**, **increasing** the level of investment spending.
Transcribed Image Text:### Transcription for Educational Website #### Scenario Analysis on Loanable Funds Market ##### Scenario 1: - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** A change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to **fall**, and the level of investment spending to **increase**. ##### Scenario 2: - **Context:** An investment tax credit effectively lowers the tax bill for any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** The implementation of the new tax credit causes the interest rate to **fall** and the level of investment to **rise**. ##### Scenario 3: - **Context:** Initially, the government's budget is balanced; the government then responds to the conclusion of a war by significantly reducing defense spending without changing taxes. - **Outcome:** This change in spending causes the government to run a budget **surplus**, which **increases** national saving. - **Action Required:** Shift the appropriate curve on the graph to reflect this change. - **Explanation:** This causes the interest rate to **fall**, **increasing** the level of investment spending.
**The Market for Loanable Funds and Government Policy** The following section details a graph representing the market for loanable funds. In this model, you are required to adjust the relevant curve based on each given scenario to analyze its impact. It is essential to reset the graph to its default state when assessing each scenario’s effect to ensure accurate observations. Note that adjustments to the graph are not graded. **Graph Explanation** The graph includes the following components: - **Axes:** - The vertical axis represents the "Interest Rate" in percentage. - The horizontal axis represents "Loanable Funds" in billions of dollars. - **Curves:** - The blue line labeled "Demand" shows the demand for loanable funds. - The orange line labeled "Supply" represents the supply of loanable funds. - **Equilibrium:** - The intersection of the demand and supply curves determines the equilibrium interest rate and the quantity of loanable funds. - **Adjustment Sliders:** - Two sliders on the right labeled "Demand" and "Supply" allow you to manually adjust the respective curves. **Scenario 1** **Individual Retirement Accounts (IRAs):** IRAs enable individuals to protect a portion of their income from taxes. Assume the maximum annual contribution to these accounts is $5,000 per person. Consider a scenario where this contribution limit increases from $5,000 to $8,000 annually. In such a case, analyze how this increased contribution capability might affect the market for loanable funds.
Transcribed Image Text:**The Market for Loanable Funds and Government Policy** The following section details a graph representing the market for loanable funds. In this model, you are required to adjust the relevant curve based on each given scenario to analyze its impact. It is essential to reset the graph to its default state when assessing each scenario’s effect to ensure accurate observations. Note that adjustments to the graph are not graded. **Graph Explanation** The graph includes the following components: - **Axes:** - The vertical axis represents the "Interest Rate" in percentage. - The horizontal axis represents "Loanable Funds" in billions of dollars. - **Curves:** - The blue line labeled "Demand" shows the demand for loanable funds. - The orange line labeled "Supply" represents the supply of loanable funds. - **Equilibrium:** - The intersection of the demand and supply curves determines the equilibrium interest rate and the quantity of loanable funds. - **Adjustment Sliders:** - Two sliders on the right labeled "Demand" and "Supply" allow you to manually adjust the respective curves. **Scenario 1** **Individual Retirement Accounts (IRAs):** IRAs enable individuals to protect a portion of their income from taxes. Assume the maximum annual contribution to these accounts is $5,000 per person. Consider a scenario where this contribution limit increases from $5,000 to $8,000 annually. In such a case, analyze how this increased contribution capability might affect the market for loanable funds.
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