the market for loanable funds and government policy The following graph shows th
ID: 2441014 • Letter: T
Question
the market for loanable funds and government policy
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. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario.
This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to fall or rise and the level of investment spending to decrease or increase
The repeal of the previously existing tax credit causes the interest rate to fall or rise and the level of investment to fall or rise
This change in spending causes the government to run a budget surplus or deficit , which decreases or increases national saving.
This causes the interest rate to rise or fall , increasing or crowding out the level of investment spending.
5. The maket for loanable funds and government policy 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. Treat each scenario separately by resetting the graph to its original state before examining the effect ofeach individual scenario. (Note: You will not be graded on any changes you make to the graph.) Demand Supply E-t nd LOANABLE FUNDS (Billons af dellars) Scenario 1: 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. Now suppose there is a decrease in the maximum contribution,Explanation / Answer
Answer:
This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to rise and the level of investment spending to decrease.
(This is because, now people can put less contribution in the IRA, and the supply of loanable funds falls and supply curve shifts leftward and interest rate rises. The investment spending falls because people can now put less money in their IRAs)
The repeal of the previously existing tax credit causes the interest rate to rise and the level of investment to fall.
(As the supply of loanable funds falls, interest rate rises and investment level falls)
This change in spending causes the government to run a budget surplus , which increases national saving.
(This is because the tax limit on contribution to IRA has decreased, so the leftover income is used for consumption purpose or can be taxed. In short, the taxable income rises, the government would receive more tax. So, it will run a budget surplus, and govt savings rises which increases the total national savngs).
This causes the interest rate to rise , crowding out the level of investment spending.
(As the interest rate rises, investment spending falls because it becomes expensive to invest at higher interest rates.)
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