The diagram below show the market for financial capital assuming that national income is constant at potential GDP, Y*.Real Interest RateI EL ME14FIGURE 25-2NSOI 11 12 13NS111Quantity ofInvestmentand Saving ($)Refer to Figure 25-2. Suppose national saving is reflected by NS, and investment demand is reflected by lo. Now suppose the governmentimplements 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.

Investment is an economic activity associated with assets that generate value and boost the…

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)

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)

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 4QR

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Question

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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