The market for loanable funds and government policy
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. (Note: You will not be graded on any changes you make to the graph.)
DemandSupplyINTEREST RATE (Percent)LOANABLE FUNDS (Billions of dollars)Demand Supply
The Question---(fill in the blanks).
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 an increase in the maximum contribution, from $5,000 to $8,000 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______ .
An investment tax credit effectively lowers the tax bill of any firm 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 reflect this change.
The implementation of the new tax credit causes the interest rate to_____ and the level of saving to______ .
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.