Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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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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According to how we model the Loanable Funds market in Ch. 6 (considering household savings and taking (T – G) as government’s net ‘saving,’ which could be negative it there were a budget deficit), which of the following shifts the Supply of Loanable Funds curve to the left? (T = taxes; G = government spending.)
Group of answer choices
A) higher tax rates on business investment spending
B) a change in tastes toward consuming less
C) higher budget deficit
D) change in tastes toward saving more
E) lower budget deficit
How does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?
Chapter 26 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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Similar questions
- 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. %3Darrow_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.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_forward
- Show on a graph of the market for saving and investment the effect of the following. (The graph is a basic savings and investment graph). In an effort to improve fiscal conditions, policymakers raise taxes. This results in lower disposable income. Real interest rate (percent per year) 10. 8 6 4 2 SLF 0 1.2 1.4 1.6 DLF 2.0 2.2 1.8 Loanable funds (trillions of 2009 dollars) The savings function [Select] The investment function [Select] The real interest rate [Select] The level of savings and investment [Select]arrow_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_forwardQ2. Suppose that Congress passed a tax reform aimed at making investment more attractive, which is called an investment tax credit. An investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment or machines. a. In the market for loanable funds, graph and explain the effects on the equilibrium real interest rate and the quantity of loanable funds? b. What happens to the quantity of saving and investment?arrow_forward
- In the Savings-Investment model, what is the effect of an increase in government spending on investment? Why?arrow_forwardd. 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_forwardSuppose Indian government borrows 50,000/- more next year than this year. Use a supply-and-demand diagram to analyze this policy. Does the interest rate rise or fall? What happens to investment? To private saving? To public saving? To national saving? Compare the size of the changes to the 50,000/- of extra government borrowing.arrow_forward
- On the following graph, show the impact of the increase in government purchases on the interest rate by shifting one or both of the curves. Supply X Demand 2 10 20 30 40 50 QUANTITY OF LOANABLE FUNDS (Billions of dollars) 12 IN TEREST RATE 10 0 0 60 ģ Demand Supply ? Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $1.25 billion. by According to the change you made to the loanable funds market in the previous scenario, the increase in government purchases causes the interest rate in the money market to from 6% to %. The change in the interest rate causes the level of investment spending to $ billion. by After the multiplier effect is accounted for, the change in investment spending will cause the quantity of output demanded to $ billion at each price level. The impact of an increase in government purchases on the interest rate and the level of investment spending is known as the effect. Place the purple line (diamond…arrow_forwardFor an imaginary closed economy, T = $5,000; S = $11,000; C = $50,000; and the government is running a budget deficit of $1,000. Then Select one: a. Private saving = $10,000 and GDP = $54,000. b. Private saving = $12,000 and GDP = $72,000. c. Private saving = $10,000 and GDP = $58,000. d. Private saving = $12,000 and GDP = $67,000.arrow_forwardThe Washington Post's headline reads "Business Confidence Reaches Highest Level in 5 Years." A. Draw a correctly labeled graph of the loanable funds market and show the effect of high business confidence on the equilibrium real interest rate. B. Assume the government increases its spending on capital projects and infrastructure. Would financing the increased government spending by borrowing result in a higher, a lower, or the same equilibrium real interest rate? Explain. C. How will the increase in government spending financed by borrowing affect national savings? D. If the expected inflation rate decreases to 0, will the nominal interest rate be greater than, less than, or equal to the real interest rate? Explain.arrow_forward
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