The following graph shows the market for loanable funds. For each of the given s

Question

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. 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 a decrease in the tax rate on interest income, from 20% to 15%. 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 to_______. 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 saving to_______. 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.

Explanation / Answer

if tax on interest income becomes 15% from 20%.This will encourage savers to save more that increases supply of lonable funds. if supply of lonable funds increases it will affect the interest rate. so interest rate will go down .

This change in the tax treatment of saving cuases the equilibrium interest rate in the market for lonable funds to DECREASE and the level of investment spending to INCREASE

The implementation of new tax credit cuases the interest rate to INCREASE and the level of saving to INCREASE.

This change in spending causes the government to run a budget DEFICIT, Which REDUCES national saving.

This causes the interest rate to increase , Reducing the level of investment spending.

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