For each of the given scenarios, use the graphs to (1) show what happens in the market for loanable funds and (2) help answer the questions that follow.

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, from $5,000 to $3,000 per year.

This change causes savers to supply (less/more) loanable funds. Because the quantity of loanable funds supplied is now (greater than/less than) the quantity of loanable funds demanded, there is (upward/downward) pressure on interest rates. This change in interest rates causes a(n) (increase/decrease) in the quantity of loanable funds demanded.

Scenario 2: An investment tax credit effectively lowers the taxes paid by firms that purchase new equipment or build a new manufacturing facility. Suppose the government implements a new investment tax credit.

The implementation of a new tax credit causes borrowers to demand (less/more) loanable funds. Because the quantity of loanable funds demanded is now (greater than/less than) the quantity of loanable funds supplied, there is (upward/downward) pressure on interest rates. This change in interest rates causes a(n) (increase/decrease) in the quantity of loanable funds supplied.

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