The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*. Real Interest Rate FIGURE 25-2 NSO 1 11 12 13 NS1 1 IP -10 Quantity of Investment and Saving (S)

Exploring Economics
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Chapter21: Financial Markets, Saving, And Investment
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The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.
Real Interest Rate
I EL ME
14
FIGURE 25-2
NSO
I 11 12 13
NS1
1
1
Quantity of
Investment
and Saving ($)
Refer to Figure 25-2. Suppose national saving is reflected by NS, and investment demand is reflected by lo. Now suppose the government
implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate?
Select one:
O a. There is no effect on NS or ID, and the interest rate remains at i*.
O b. The real interest rate rises because of the decrease in the budget surplus.
O C. National saving shifts to NS₁, and the real interest rate falls to i3.
O d. Investment demand shifts to 1₁D, and the real interest rate rises to i₂.
O e. The real interest rate falls because of the decrease in the budget surplus.
Transcribed Image Text:The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*. Real Interest Rate I EL ME 14 FIGURE 25-2 NSO I 11 12 13 NS1 1 1 Quantity of Investment and Saving ($) Refer to Figure 25-2. Suppose national saving is reflected by NS, and investment demand is reflected by lo. Now suppose the government implements a revenue-neutral tax policy that encourages investment. What is the effect on the real interest rate? Select one: O a. There is no effect on NS or ID, and the interest rate remains at i*. O b. The real interest rate rises because of the decrease in the budget surplus. O C. National saving shifts to NS₁, and the real interest rate falls to i3. O d. Investment demand shifts to 1₁D, and the real interest rate rises to i₂. O e. The real interest rate falls because of the decrease in the budget surplus.
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