EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
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Chapter 12, Problem bFCT
To determine
The reasons because of which the desirable flow of real investment is considered to be more sensitive to an increase of one-half percentage point increase are to be determined.
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5. The market for loanable funds and government policy
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.)
INTEREST RATE (Percent)
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
Demand
Supply
?
5. The market for loanable funds and government policy
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.)
INTEREST RATE (Percent)
I
Demand
LOANABLE FUNDS (Billions of dollars)
Supply
Demand
Supply
*
Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year.
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 tofall and the level of investment spending toincrease .
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 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 tofall and the level of saving tofall .
Scenario 3: Initially, the government's budget is balanced; then…
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