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5. The market for loanable funds and goverament policy The following graph shows the market for loanable funds. For each of the glver scenarios, adjust the appropriate curve on the graph to heip you complete the questions that follow. Treat each scenario separately by resetting the graph to its ofiginal state before examining the eifect of each individual scerorio. (Note You will not be graded on any changes you make to the graph.) (7) LOANGALE FUNDS (Dhilocs of doles) Scenario 1: Suppose savers either buy bosds or make deposits in savings accounts at banks, In itiayy, the interest income earned on bonds oe 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 eppropiate cunve on the graph to reflect thus change This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loansble funds to Ifvel of imvestment spending to


Scenario 1: Suppose savers elther 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 $25 \%$. Shir the appropriate curve on the graph to refiect 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 and the. level of investment spending to 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 and the level of investment to Scenacio 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 , which national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to the level of investment spending. Save \& Continue Continue without saving

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