EBK PRINCIPLES OF ECONOMICS
7th Edition
ISBN: 8220102958395
Author: Mankiw
Publisher: CENGAGE L
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Question
Chapter 26, Problem 9PA
Subpart (a):
To determine
The difficulties in increasing the investment of the economy.
Subpart (b):
To determine
The difficulties in increasing the investment of the economy.
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In the graph you've just made, how does a tax on interest income influence the real interest rate and investment? A tax on interest income _______ loanable funds, which _______ the real interest rate and _______ investment.
A. decreases the demand for; raises; decreases
B. decreases the supply of; raises; decreases
C. increases the supply of; lowers; increases
D. increases the demand for; lowers; increases
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How does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?
a. Consider the Market for Loanable Funds in a closed economy. What would be the impacts of the following events
on interest rates and investment.
i. The government introduces a tax credit for savings accounts of up to $10,000 per year.
ii. The government introduces a tax credit for savings accounts of up to $10,000 per year, and at the same time it
repeals an investment tax exemption provision.
iii. The government raises the tax rates.
iv. The government issues bonds worth $10 billion.
b. In a closed economy GDP = $1,400, private saving = $225, government budget deficit = $15, and government
spending $25 (all numbers are in billions). Calculate national saving, taxes, and consumption.
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Chapter 26 Solutions
EBK PRINCIPLES OF ECONOMICS
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Similar questions
- Recently, the economies of North Korea and Norway have begun to grow very rapidly. This increases their citizens’ income and wealth as well. In turn, these citizens increase their savings not only in their country, but also in the United States. In this case, which of the following statements is correct? A. The supply of loanable funds decreases as savings increase. B. The supply of loanable funds increases as savings increase. C. The demand of loanable funds decreases as savings increase. D. Both supply and demand of loanable funds increase as savings increase.arrow_forwardRecently, the economies of North Korea and Norway have begun to grow very rapidly. This increases their citizens’ income and wealth as well. In turn, these citizens increase their savings not only in their country, but also in the United States. In this case, which of the following statements is correct? A. The supply of loanable funds decreases as savings increase. B. The supply of loanable funds increases as savings increase. C. The demand of loanable funds decreases as savings increase. D. Both supply and demand of loanable funds increase as savings increase. Clear my choicearrow_forwardSuppose that every additional 3 percentage points in the investment rate boosts GDP growth by 1 percentage point. Assume also that all investment must be financed with consumer saving. Note: Investment rate = Investment/GDP The economy is currently characterized by $12 trillion $2 trillion Consumption: Saving (= Investment): GDP: $14 trillion If the goal is to raise the growth rate by 2 percentage points, a. by how much must investment increase? billion b. by how much must consumption decline? : billionarrow_forward
- d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of the loanable funds market, show the effect of the government’s borrowing on the real interest rate. e. Given the change in the real interest rate in part (d), what is the impact on each of the following? Investment Economic growth rate. Explain.arrow_forwardUsing a correctly labeled loanable funds graph, show the effect of the contractionary fiscal policy decreasing government spending on real interest rates. Given the change in the real interest rate. What is the impact on each of the following? a. investment b. Economic growth rate. Explain. c. The international value of the dollar. Explain. Now assume instead that the government takes no policy action to fix the problem of the economy that is operating above full employment. In the long run, will the short-run aggregate supply increase, decrease, or remain unchanged? Explain.arrow_forward3. In cases below, answer questions below. 3.a. People’s preference for saving increased (so people would save more.) Which curve (demand or supply) would shift to which direction (left or right)? How would investment change: Decrease or Increase? Curve: Direction: Change in investment: 3.b. Prospect for profit from investments increased. How would the equilibrium quantity of loanable fund change: Decrease or Increase? How would the equilibrium interest rate change: Decrease or Increase? How would the saving would change: Decrease or Increase? Quantity: Interest rate: Change in savingarrow_forward
- Why is there a trade-off between the amount of consumption that people can enjoy today and the amount of consumption that they can enjoy in the future? Why can’t people enjoy more of both? How does saving relate to investment and thus to economic growth? What role do banks and other fifinancial institutions play in aiding the growth process?arrow_forwardIf households are sufficiently forward-looking, a debt-financed tax cut would likely consumption and national saving. a. increase; not change b. not change; increase C. increase; decrease d. not change; not changearrow_forward3.3 Explain and show graphically how an increase in household saving affects the equilibrium interest rate and the equilibrium quantity of loanable funds. 3.4 Explain and show graphically how an increase in expected profits from firm investment projects affects the equilibrium interest rate and the equilibrium quantity of loanable funds. 3.5 Explain and show graphically how an increase in government spending (i.e. budget deficit) affects the equilibrium interest rate in the market for loanable funds.arrow_forward
- Tax systems and savingarrow_forwardClassify each of the following based on the macroeconomic definitions of saving and investment.arrow_forwardDraw a graph of the supply and demand of loanable funds. Then, show how the interest rate will be affected when the following scenarios occur: a. The government implements a program that reduces investment tax credits. b. The government budget deficit is reduced by 30%. (Hint: Does the government still need to borrow?) c. More foreigners are saving their money in U.S. banks.arrow_forward
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