5. The market for loanable funds and government policy. Suppose the maximum annual contribution to such accounts is $5000 per person. Now suppose theres an increase in the maximum contribution, from $5000 to $8000 per year. 1) This change in the tax treatment of 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 ? 2) An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previous existing investment tax credit. The repeal of the previously existing tax credit causes the interest rate to fall or rise ? and the level of saving to fall or rise? 3) Inititally, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes. This change in spending causes the government to run a budget surplus or deficit ? Which decrease or increases ? national saving. This causes the interest rate to fall or rise ? crowding out or increasing ? the level of investment spending.

Homework (Ch 13) Supply Demand Supply INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars)