PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 9, Problem 8P
(a)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the legislature passes an investment tax credit.
(b)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the government has surplus budget.
(c)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the new generation of computer-controlled machines is implemented.
(d)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the government raises its taxes on corporate profits.
(e)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the precautionary saving increases.
(f)
To determine
Determine the changes in the real interest rate, national saving, and investment, when the environmental regulations increase the operating capital cost.
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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) .
Crusoe will live this period and the next period as the lone inhabitant of his island. His only income is a crop of 100 coconuts that he harvests at the begin- ning of each period. Coconuts not consumed in the current period spoil at the rate of 10 percent per period. (LO5) a. Draw Crusoe’s intertemporal budget constraint. What will be his consump- tion in each period if he regards future consumption as a perfect, one-for- one substitute for current consumption? b. What will he consume each period if he regards 0.8 unit of future consump- tion as being worth 1 unit of current consumption?
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 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…
Chapter 9 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- What Are Real Yields, and Why Do They Matter? Summary: Now that inflation has subsided somewhat, the market is experiencing favorable real rates. Positive real rates are good for savers, but potentially problematic for the equity markets. Real rates, the difference between on-the-run treasuries and inflation (most recently auctioned bond), in June 2022 was -6.16 (2.94 - 9.1). This meant that savers were earning a negative yield on their fixed- income investments. Today, real rates are the highest they have been since 2009. A welcome change especially for retirees living on a fixed income. However, that assumes that retirees have rotated their investments into fixed income. Since the rates on bonds were so low, retirees were forced to invest in riskier assets like common stock to get a return that kept up with inflation. As higher rates entice more and more investors to sell their riskier assets, those retirees who have not rotated their assets back into fixed income could lose…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 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_forwardScenario 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 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 _______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) Supply Demand LOANABLE FUNDS (Billions of dollars) Demand Supply ?arrow_forwardQ5) Consumption-Saving Choice Based on Abel, Bernanke and Croushore, 10th edition, Chapter 4, Numerical Problems No. 1. A consumer is making saving plans for this year and next. She knows her real income after taxes will be $50,000 in both years. Any part of her income saved this year will earn a real interest rate of 10% between this year and next year. Currently, the consumer has no wealth (no money in the bank or other financial assets, and no debts). There is no uncertainty about the future. a) Formally derive the consumer's intertemporal budget constraint. b) Using the given numerical values rewrite and graph the budget line. c) Find the consumer's PVLR.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) Demand LOANABLE FUNDS (Billions of dollars) Supply Demand Supplyarrow_forward
- Real interest rate (percent) C) an increase in corporate taxes D) a decrease in tax credits for savings Supply D₁ L₁ 4 Loanable funds (dollars per year) 11) Refer to Figure above. A shift from D₂ to Di will result from which of the following? A) an increase in expected future profits B) an increase in net exports A) an increase in the equilibrium real interest rate. B) a decrease in the equilibrium real interest rate. D₂ 12) All else equal, an increase in net exports accompanied by a decrease in expected future profits would definitely result in C) an increase in the equilibrium level of saving and investment. D) a decrease in the equilibrium level of saving and investment.arrow_forwardAssume you are the Minister of Finance and Economic Planning for Ghana, in charge of Fiscal Policy. The Research Director of the Ministry brought you the following data on Ghana for the previous fiscal year, 2021. An examination of the data reveals that, during the fiscal year 2021, households in Ghana saved 20% of their disposable income (Yd) and spent the rest on consumption. In addition, GH¢5,000.00 was spent on Consumption expenditure (C), which is independent of income and Gross Private Investment (I) was GH¢7,000.00. Total Government expenditure (G) which stood at GH¢8,000.00 was supposed to be financed by a lump sum tax of GH¢2,000.00 (independent of income) and a proportional tax rate of 25% of national income. Exports (X) stood at GH¢2,500.00. In addition, the country’s import (M) during the previous fiscal year comprises of GH¢1,000.00 which was independent of the country’s national income and 10% which was dependent of the country’s national income. Given these data on Ghana…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
- 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…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 1 Supply ?arrow_forwardThe 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 Supplyarrow_forward
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