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Scenario 1 : Individual Retirement Accounts ( IRAs ) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution
Scenario : Individual Retirement Accounts IRAs allow workers to shelter a portion of their income from taxation. Suppose the maximum annual
contribution to accounts of this type is $ per person. Now suppose there is an increase in the maximum contribution, from $ to $ per
year.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to fall grad and the level of investment
spending tc
Scenario : An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose
the government implements a new investment tax credit.
Shift the appropriate curve on the graph to reflect this change.
The implementation of the new tax credit causes the interest rate to rise grad and the level of investment to fall grad.
Scenario : Initially, 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 deficit grad, which increases grad national saving.
Shift the appropriate curve on the graph to reflect this change.
This causes the interest rate to
the level of investment spending.
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