Question

6. Assume the Federal Government is planning to change its 401K retirement rules such that workers utilizing these plans can now allocate 20% of their pay to a tax deferred retirement plan instead of 15%. Based on the loanable funds theory of interest rates and barring any other developments, please explain the impact of this 401K rule change on interest rates.

Answer 1

Golk A-c) The rule changes has increased the of allocation the pay to the retirement plan. This will increase the level of private sainings Interest I - - in the economy. As the private sanings d'increase, National sanings will increase. This will ssi ini shift the supply curve of Loanable si se fund rightworld to sist and at new & X sanings point , the equilibrium rate è of interest has tomestment decreased to Ois and equilibrium level of sanings and to nestment increased in the economy. Thus 401k rule will decrease the level of interest rate in change the funds market.