Answered step by step
Verified Expert Solution
Question
00
1 Approved Answer
Hello, I need some assistance with the following: Background information The following graph shows the market for loanable funds. For each of the given scenarios,
Hello, I need some assistance with the following:
Background information
The following graph shows the market for loanable funds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.) O Supply Demand Supply INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars)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. Shift the appropriate curve on the graph to reect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to V and the level of investment spending to v . Scenario 2: An investment tax credit effectively lowers the tax bill of any rm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. Shift the appropriate curve on the graph to reect this change. The implementation of the new tax credit causes the interest rate to V and the level of saving to 7 Scenario 3: Initially, the government's budget is balanced; then the government responds to the conclusion of a war by signicantly reducing defense spending without changing taxes. This change in spending causes the government to run a budget V , which V national saving. Shirt the appropriate curve on the graph to reect this change. This causes the interest rate to V I, V the level of investment spendingStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started