EBK FOUNDATIONS OF ECONOMICS
8th Edition
ISBN: 8220103632225
Author: PARKIN
Publisher: PEARSON
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Chapter 26, Problem 3IAPA
To determine
To find:
The years in which wealth was more than saving, the years in which savings was more than wealth and the way change in wealth is different from change in savings.
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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…
1. How does the U.S. savings rate compare to that of another country?
2. How is the U.S. doing?
3. What does the Bible say about saving and/or investing? According to Prov. 13:22, Prov. 22:7, Rom. 13:8, Matt. 25:14-30, and Luke 19:12-26.
How do the sophisticated financial systems of modern economies affect the relationship between saving and investment?
Chapter 26 Solutions
EBK FOUNDATIONS OF ECONOMICS
Ch. 26 - Prob. 1SPPACh. 26 - Prob. 2SPPACh. 26 - Prob. 3SPPACh. 26 - Prob. 4SPPACh. 26 - Prob. 5SPPACh. 26 - Prob. 6SPPACh. 26 - Prob. 7SPPACh. 26 - Prob. 8SPPACh. 26 - Prob. 9SPPACh. 26 - Prob. 1IAPA
Ch. 26 - Prob. 2IAPACh. 26 - Prob. 3IAPACh. 26 - Prob. 4IAPACh. 26 - Prob. 5IAPACh. 26 - Prob. 6IAPACh. 26 - Prob. 7IAPACh. 26 - Prob. 8IAPACh. 26 - Prob. 9IAPACh. 26 - Prob. 10IAPACh. 26 - Prob. 1MCQCh. 26 - Prob. 2MCQCh. 26 - Prob. 3MCQCh. 26 - Prob. 4MCQCh. 26 - Prob. 5MCQCh. 26 - Prob. 6MCQCh. 26 - Prob. 7MCQCh. 26 - Prob. 8MCQ
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Problem 1: Identify each of the following acts as representing either saving or investment. a. Lan uses some of his income to buy government bonds. b. Minh takes some of his income and buys mutual funds. c. Linh purchases a new truck for his delivery business using borrowed funds. d. Peter uses some of his income to buy stock in a major corporation, e. Dave hires a builder to construct a new home using borrowed funds.arrow_forwardEXERCISE 10.9 LIMITS ON LENDING Many countries have policies that limit how much interest a moneylender can charge on a loan. Do you think these limits are a good idea? Who benefits from the laws and who loses? What are likely to be the long-term effects of such laws? Tips: For Question 2, you may think about how a low interest rate would affect the poor and those who owe huge debts. For Question 3, you may think about how it would affect the profitability of the banking sector and the supply of lending (will lenders be encouraged to lend more?), and what implications it may have for "credit rationing" (being credit constrained).arrow_forwardBriefly discuss THREE economic policies that encourages household savings.arrow_forward
- Suppose the government borrows $20 million more next year than this year. What happens to investment? To private savings? To public savings? To national savings? How does the elasticity of the supply of loanable funds affect the size of these changes? How does the elasticity of the demand of loanable funds affect the size of these changes?arrow_forwardThe importance of income in determining savings has persisted since the time of Keynes. Why have other theories failed to displace income as the most critical variable in saving theory?arrow_forwardBased on Abel, Bernanke and Croushore, 10th edition, Chapter 4, Numerical Problems No. 1. A consumer is making saving plans for this year and next. She knows her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10% between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future. a) Formally derive the consumer’s intertemporal budget constraint. b) Using the given numerical values rewrite and graph the budget line. c) Find the consumer’s PVLR. The consumer wants to save an amount this year that will allow her to (1) make college tuition payments next year equal to $16,800 in real terms; (2) enjoy exactly the same amount of consumption this year and next year, not counting tuition payments as part of next year’s consumption; and (3) have neither assets nor debts at the end of next year. d) In the…arrow_forward
- Chairman Latrobe, the Supreme Leader of Rolling Rock decided to increase the personal tax rate to fund the defense force. 8) How may this affect the loanable funds market? Explain by describing the change in the demand for, or the supply of, loanable funds. 9) Because of the change decreed by President Thug and your answer to question 8, what is likely to happen to the interest rate and the quantity of funds in the loanable funds market? 10) How will each of these Rolling Rockers feel about President Thug’s decision? (A) Investor Confidence (B) The President of Rolling Rock National Bankarrow_forwardSuppose the government changes the tax code, allowing individuals to reduce their taxable income if they save money in registered retirement savings plans (RRSPs). Your response should answer the following questions: State and explain which loanable funds curve would this policy affect? Which way would the loanable funds curve shift? What would be the impact on interest rates? Draw the loanable funds diagram to illustrate your answers for a to c.arrow_forwardAccording 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 deficitarrow_forward
- Why is investing a more powerful tool to build long-term wealth than saving?arrow_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_forwardFinancial institutions have warned that increased life expectancy means that many people have not saved enough for their retirement. If true, what will the consumption path of these people look like as they reach their retirement years? Will this consumption path be smooth? And how will an increase in investment demand change the equilibrium interest and quantity of savings? Use a graph for the loanable funds market.arrow_forward
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