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 Fall/Rise and the level of investment spending to decrease/Increase 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 Fall/Rise and the level of investment to 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 Surplus/Dificit, which Increaces/decreses national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to Rise/Fall , Crowding out/Increacing 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 Fall/Rise and the level of investment spending to decrease/Increase 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 Fall/Rise and the level of investment to 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 Surplus/Dificit, which Increaces/decreses national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to Rise/Fall , Crowding out/Increacing the level of investment spending.
Chapter18: The Keynesian Model
Section: Chapter Questions
Problem 6SQP
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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 Fall/Rise and the level of investment spending to decrease/Increase
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 Fall/Rise and the level of investment to 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 Surplus/Dificit, which Increaces/decreses national saving.
Shift the appropriate curve on the graph to reflect this change.
This causes the interest rate to Rise/Fall , Crowding out/Increacing the level of investment spending.
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