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Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance? b. Representatives of several large exporters oppose the policy. Why might that be the case?

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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BuyFindarrow_forward

Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 32, Problem 2PA
Textbook Problem
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Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment.

a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance?

b. Representatives of several large exporters oppose the policy. Why might that be the case?

Sub part (a):

To determine
Impact of investment tax credit that subsidizes domestic investment.

Explanation of Solution

The tax is a unilateral payment made by the people to the government of the economy. When the government collects the taxes, the revenue of the government is collected with which the government can make the public expenditures.

When the government introduces the tax credit on the investments, this means that those who have investments in the economy will have some tax credits available, which subsidizes the domestic investments of the economy. This passing of law will make the desire of the capitalists to invest more to increase. As a result, more borrowings take place in the economy, which increases the demand for the lonable funds in the lonable fund market. This situation can be illustrated as follows:

The increased demand for the lonable funds in the lonable fund market would lead to the increase in the real interest rate in the economy...

Sub part (b):

To determine
Impact of investment tax credit that subsidizes domestic investment.

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