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 (fall,rise) and the level of investment spending to (decrease,increase). 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). Initially, the government's budget is balanced, then the government responds to the conclusion of a war by significantly reducing defence spending without changing taxes. This change in spending causes the government to run a budget (surplus, deficit) , which (increase,decrease) national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to (fall,rise) , (increasing, crowding out) the level of investment spending.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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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 (fall,rise) and the level of investment spending to (decrease,increase).

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).

Initially, the government's budget is balanced, then the government responds to the conclusion of a war by significantly reducing defence spending without changing taxes.

This change in spending causes the government to run a budget (surplus, deficit) , which (increase,decrease) national saving.

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

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

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. (Note: You will not be graded on any changes you make to the graph.)
Supply
Demand
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
INTEREST RATE (Percent)

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