2. Question 2 (supply and demand of loanable funds). This question is related to Chap 2, LG 2-4 in the book. (a) In the U.S., interest income is taxed. For simplicity, let's assume the tax rate to be 30%. Therefore, if you lend $100,000 to someone and get paid back $100,000 plus $10,000 interest (10% interest rate), you need to pay 30% $10,000 $3,000 to the IRS (you end up with $7,000 take-home interest income). Questions: i. Suppose interest income tax rate suddenly increases (e.g. to 50%). What is the impact on the demand curve of lending? What is the impact on supply curve? ii. Based on the supply-demand diagram (e.g., Figure 2-4 in the book), what do you expect to happen to the overall quantity of lending and the (pre- tax) interest rate in the market? (b) In the U.S., mortgage interest payments are tax deductible. That is, a mort- gage borrower can pay less income tax if she also pays a mortgage. Question: consider the mortgage lending market. How does the policy of allowing for mortgage interest tax deduction impact the demand and supply curves of mortgage lending?6 What about the impact on the overall quantity of mortgage lending and mortgage interest rate? (c) In the U.S., much of mortgage lending is guaranteed directly or indirectly by the Federal government. That is, if you are an investor (lender) in the mortgage market, you don't have to worry about the mortgage borrowers de- faulting. In case of a default, the government will pay you. Question: How does this impact the supply curve, demand curve, as well as equilibrium quantity and interest rate in mortgage lending