Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The following table contains data for a hypothetical closed economy that uses the dollar as its currency. Suppose GDP in this country is $1,170 million.

image text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribedimage text in transcribed
The following table contains data for a hypothetical closed economy that uses the dollar as its currency. Suppose GDP in this country is $1,170 million. Enter the amount for investment. Value National Income Account ( Millions of dollars) Government Purchases (G) 300 Taxes minus Transfer Payments (T) 390 Consumption (C) 450 Investment (I) 420 K Complete the following table by using national income accounting identities to calculate national saving. In your calculations, use data from the preceding table. National Saving (S) = Y - C - G = $ millionScenario 1: 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 $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 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 __ and the level of investment spending to Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate to _ and the level of saving to Scenario 3: 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 , which national saving. Shift the appropriate curve on the graph to reflect this change. This causes the interest rate to the level of investment spending.The following graph shows the loanable funds market. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow. Consider each scenario separately by returning the graph to its starting position when moving from one scenario to the next. (Note: You will not be graded on any changes you make to the graph.) O Demand Supply Supply INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars)INTERES Demand N O 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 LOANABLE FUNDS (Billions of dollars) is the source of the demand for loanable funds. As the interest rate falls, the quantity of loanable funds demanded Suppose the interest rate is 5.5%. Based on the previous graph, the quantity of loanable funds supplied is than the quantity of loans demanded, resulting in a of loanable funds. This would encourage lenders to the interest rates they charge, thereby the quantity of loanable funds supplied and the quantity of loanable funds demanded, moving the market toward the equilibrium interest rate of %preceding table. National Saving (S) = Y- C- G = I V $ million Complete the following table by using national income accounting identities to calculate private and public saving. In your calculations, use data from the initial table. Private Saving = Y- C- T $ million Public Saving = T - G = $ million Based on your calculations, the government is running a budget surplusThe following graph shows the market for loanable funds in a closed economy. The upward-sloping orange line represents the supply of loanable funds, and the downward-sloping blue line represents the demand for loanable funds. 12 K 11 Supply 10 INTEREST RATE (Percent) A Demand N 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 LOANABLE FUNDS (Billions of dollars)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Climate Policy And Nonrenewable Resources The Green Paradox And Beyond

Authors: Karen Vollebergh, Rick Van Der Ploeg

1st Edition

0262319845, 9780262319843

More Books

Students also viewed these Economics questions