Scenario 1: Individual Retirement Accounts (IRAS) allow workers to shelter a portion of their income from taxation. Suppose the maximum annualcontribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 peryear.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 tospending toScenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Supposethe government repeals a previously existing investment tax credit.Shift the appropriate curve on the graph to reflect this change.The repeal of the previously existing tax credit causes the interest rate toThis change in spending causes the government to run a budgetScenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changingtaxes.Shift the appropriate curve on the graph to reflect this change.and the level of saving toThis causes the interest rate to, whichand the level of investmentthe level of investment spending.national saving. 4. The market for loanable funds and government policyThe following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you completethe questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next.(Note: You will not be graded on any changes you make to the graph.)INTEREST RATE (Percent)SupplyLOANABLE FUNDS (Billions of dollars)DemandDemandSupply

Loanable funds market shows how borrowing takes place in an economy. Savings are shown on the supply…

Scenario 1: Individual Retirement Accounts (IRAS) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year. 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 spending to Scenario 2: An investment tax credit effectively lowers the tax bill the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to This change in spending causes the government to run a budget Shift the appropriate curve on the graph to reflect this change. Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This causes the interest rate to any firm that purchases new capital within some relevant time period. Suppose r and the level of saving to , which and the level of investment the level of investment spending. national saving.

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter21: Financial Markets, Saving, And Investment

Section: Chapter Questions

Problem 6P