Question

Use the model of loanable funds to answer the following questions: In the long-run, how does a increase in taxes affect the real interest rate (r)? Include the appropriate diagram. How does the policy affect the levels of (i) national income (Y ), (ii) consumption (C), and (iii) investment (I)? How do you know?

Answer 1

Ans:

The loauble descóibes how that borrowing happens The Supply & demand of loauable Freuds depends upon savings and borrowings. - Increouse Ju taxes also Sucreases the Interest rate Talhen hiterest are high econoney tend to be slow. . The cuts in the taxes implies rising interest rate. 2 Interest rate As the tax slab moves to b ity followed by the interest at the point . & 2. - The policy bill affect National Income in positive olay. As the tax rates are increased the Income bellll generated more than before. But at the same time higher interest rate may Cause some parts of the economy - the Consumption blould be lowered the after the tax reforms. The personal Income of the Consenser Would be loward but the governments Consumption lalill Increase

- After the policy the government try to Juwest the more of their income, As the Income and consumption G also Increased. All this level Consumption, - National Income , & Juvestment Jalill - Increase after the policy,