Question

 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. Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenario. (Note: You will not be graded on any changes you make to the graph.)

 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 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 to _______ .

 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 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 investment 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.

Answer 1

Blanks

1) fall

2) increase

3) fall

4) fall

5) surplus

6) increases

7) fall

8) increasing