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. (graph in image) 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 an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease). 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 (a. fall, b. rise) and the level of investment to (a. fall, rise). Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budget (a. deficit, b.surplus) , which (a. increases, b. decreases) national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to (a. fall, b. rise), (a. crowding out, b. increasing) the level of investment spending

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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.

(graph in image)

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 an increase in the tax rate on interest income, from 20% to 25%.

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

This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to (a. fall, b. rise) and the level of investment spending to (a. increase, b. decrease).

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 (a. fall, b. rise) and the level of investment to (a. fall, rise).

Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes.

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

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

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

**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 an increase in the tax rate on interest income, from 20% to 25%.

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

This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to _______ and the level of investment spending to _______.

**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 investment to _______.

**Scenario 3**: Initially, the government’s budget is balanced; then the government significantly increases spending on national defense 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.*

This causes the interest rate to _______ , _______ the level of investment spending.

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.)

### Graph Explanation

The graph illustrates the market for loanable funds, with the vertical axis representing the interest rate (percent) and the horizontal axis showing the quantity of loanable funds (billions of dollars).

- **Supply Curve**: Represented by the upward-sloping orange line, indicating that as the interest rate increases, the supply of loanable funds also increases.
- **Demand Curve**: Represented by the downward-sloping blue line, showing that as the interest rate decreases, the demand for loanable funds increases.

The intersection of the supply and demand curves indicates the equilibrium interest rate and the equilibrium quantity of loanable funds in the market.

Adjustable sliders are present on the graph to modify the positions of the demand and supply curves to analyze different scenarios.

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