PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 2RQ
To determine
Determine the two ways that are used by the financial system to improve the allocation of savings.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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.)
INTEREST RATE (Percent)
Supply
LOANABLE FUNDS (Billions of dollars)
Demand
Demand
1
Supply
Scenario 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 a decrease in the maximum contribution, from $6,000 to $4,000 per
year.
Shift the appropriate curve on the graph to reflect 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
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
This change in spending causes the government to run a budget
Scenario 3: Initially, the government's budget…
5. The market for loanable funds and government policy
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.)
INTEREST RATE (Percent)
Supply
Demand
LOANABLE FUNDS (Billions of dollars)
Demand
1
Supply
?
Chapter 11 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Knowledge Booster
Similar questions
- Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect 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 Fall/Rise and the level of investment spending to decrease/Increase Scenario 2: 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 Fall/Rise and the level of investment to Fall/Rise . Scenario 3: Initially, the government's budget is…arrow_forwardThe table given below shows an economy’s demand for loanable funds and the supply of loanable funds schedules when the government’s budget is balanced. Real Interest rate (% per year) Loanable fund demanded (Trillian of 2002 $) Loanable fund supplied (Trillian of 2002 $) 4 8.5 5.5 5 8 6 6 7.5 6.5 7 7 7 8 6.5 7 9 6 8 10 5.5 8.5 1. If the government has a budget surplus of $1 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation? 2. If the government has a budget deficit of $1 trillion, what are the real interest rate, the quantity of investment, and the quantity of private saving? Is there any crowding out in this situation? 3. If the government has a budget deficit of $1 trillion and the Ricardo-Barro effect occurs, what are the real interest rate and the quantity of investment?arrow_forwardScenario 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 tofall and the level of investment spending toincrease . 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 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 tofall and the level of saving tofall . Scenario 3: Initially, the government's budget is balanced; then…arrow_forward
- Suppose you have a monthly income of $1000, $850 in monthly expenses, and you can put money in a savings account that yields a monthly interest rate of 4%. Now suppose you have an opportunity to invest your money at a 12% return. Further suppose you are able to borrow at 3%. Assuming you invest all of your money and then borrow against your future payout, show your trade-off between present and future consumption. If you still need to consume $850 in the present, how much will you have to spend in the future?arrow_forwardEXERCISE 10.9 LIMITS ON LENDING Many countries have policies that limit how much interest a moneylender can charge on a loan. Do you think these limits are a good idea? Who benefits from the laws and who loses? What are likely to be the long-term effects of such laws? Tips: For Question 2, you may think about how a low interest rate would affect the poor and those who owe huge debts. For Question 3, you may think about how it would affect the profitability of the banking sector and the supply of lending (will lenders be encouraged to lend more?), and what implications it may have for "credit rationing" (being credit constrained).arrow_forward5. The market for loanable funds and government policy 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.) INTEREST RATE (Percent) Supply Demand LOANABLE FUNDS (Billions of dollars) Demand Supply ?arrow_forward
- 5. The market for loanable funds and government policy 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.) INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Demand Supplyarrow_forwardScenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Shift the appropriate curve on the graph to reflect 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(fall,rise) and the level of investment spending to(decrease,increase) .arrow_forwardRoss has a summer beach cottage that he has owned for many years. The cottage is valued at $75,000. This year, Ross spends $300 on paint and $575 on trees, and then paints the exterior of the cottage and plants the trees himself. If he had hired a professional painter, it would have cost $1,250 to paint the cottage (not including the cost of paint), and if he had hired a professional landscaper, it would have cost $450 (not including the cost of the trees) to do the planting. How much does Ross's improvements to the cottage add to GDP this year? The increase in GDP would be $arrow_forward
- Ross has a summer beach cottage that he has owned for many years. The cottage is valued at $75,000. This year, Ross spends $300 on paint and $575 on trees, and then paints the exterior of the cottage and plants the trees himself. If he had hired a professional painter, it would have cost $1,250 to paint the cottage (not including the cost of paint), and if he had hired a professional landscaper, it would have cost $450 (not including the cost of the trees) to do the planting. How much does Ross's improvements to the cottage add to GDP this year? The increase in GDP would be $ 875. If Ross had hired the painter and the landscaper, how would Ross's improvements to the cottage have added to GDP this year? The increase in GDP would be $arrow_forwardDemand Supply Supply Demand LOANABLE FUNDS (Billions of dollars) Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. INTEREST RATE (Percent)arrow_forwardScenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is a decrease in the tax rate on interest income, from 20% to 15%. 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 toarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSON
Engineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education