Draw a demand for loanable funds curve and a supply of loanable funds curve. Label them

DLFSubscript0

and

SLFSubscript0.

Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1.

Now the government imposes a tax on capital income.

Draw a curve that shows the effect of this tax. Label it.

Draw a point at the new equilibrium interest rate. Label it 2.

Draw a point to show the new after-tax interest rate. Label it 3.

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Part 1

The quantity of investment and borrowing that firms plan to undertake depends on ______.

A.

the Laffer curve

B.

potential GDP

C.

the tax on interest income

D.

how productive capital is and what it costs