INTEREST RATE (Percent) Demand Supply LOANABLE FUNDS (Billions of dollars) Shift the appropriate curve on the graph to reflect this change. Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits s taxed at a rate of 18%. Now suppose there is a decrease in the tax rate on interest income, from 18% to 14%. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to spending to Shift the appropriate curve on the graph to reflect this change. Demand ⠀ Supply Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose he government repeals a previously existing investment tax credit. The repeal of the previously existing tax credit causes the interest rate to (?) This change in spending causes the government to run a budget I This causes the interest rate to Shift the appropriate curve on the graph to reflect this change. M. Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing axes. and the level of investment to , which 1 and the level of investment the level of investment spending. national saving.
INTEREST RATE (Percent) Demand Supply LOANABLE FUNDS (Billions of dollars) Shift the appropriate curve on the graph to reflect this change. Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits s taxed at a rate of 18%. Now suppose there is a decrease in the tax rate on interest income, from 18% to 14%. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to spending to Shift the appropriate curve on the graph to reflect this change. Demand ⠀ Supply Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose he government repeals a previously existing investment tax credit. The repeal of the previously existing tax credit causes the interest rate to (?) This change in spending causes the government to run a budget I This causes the interest rate to Shift the appropriate curve on the graph to reflect this change. M. Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing axes. and the level of investment to , which 1 and the level of investment the level of investment spending. national saving.
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 5PA
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Transcribed Image Text:The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete
the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next.
(Note: You will not be graded on any changes you make to the graph.)
14
INTEREST RATE (Percent)
Demand
Supply
LOANABLE FUNDS (Billions of dollars)
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 18%. Now suppose there is a decrease in the tax rate on interest income, from 18% to 14%.
Shift the appropriate curve on the graph to reflect this change.
Demand
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment
spending to 1
Supply
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose
the government repeals a previously existing investment tax credit.
This change in spending causes the government to run a budget
This causes the interest rate to
(?)
The repeal of the previously existing tax credit causes the interest rate to and the level of investment to
Shift the appropriate curve on the graph to reflect this change.
H..
Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing
taxes.
, which
I
the level of investment spending.
national saving.
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