Individual Retirement Accounts (IRAs) allow people to shelter some of their inco

Question

Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Shift the appropriate curve(s) on the following graph to show how a decrease in the maximum contribution, from $5,000 to $3,000 per year, would affect the market for loanable funds. 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 .

Explanation / Answer

In this case, demand would shift to the left causing the interest rate to fall and the level of investment spending to fall

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