Question

How would each of the following scenarios, using supply and demand of analysis to predict the resulting changes in the real interest rates, national saving, and investment. Show your answers graphically and briefly explain. 

A.An increase in military spending moves the government’s budget from surplus into deficit.

B.Concerns over job security raises precautionary saving.

C.New computer-controlled machines are able to produce manufactured goods more efficiently and with fewer defects.

D.New environmental regulations increase firms’ costs of operating capital.

E.The legislature passes a 20 percent investment tax credits.

Answer 1

A. Increased military spending leads to fall in public savings. Savings curve shifts left. Real interest rate rises.

B. Increased precautionary savings raises savings. Supply curve shifts right. Real intereat rate falls.

C. Efficiency increases, demand for investment falls. Real interest rate falls.

D. Increased cost of capital due to environmental regulations leads to fall in investment. Investment shifts left. Real interest rate falls.

E. Investment tax credit raises firma willingness to invest. Investment shifts right. Real interest rate rises.

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