Question

Question 13 (Ch21&22) An increase in (i) tax benefits for saving; (ii) the desire of households to consume today; (iii) corporate taxes; (iv) expected future profits; and (v) the government's budget deficit will cause effects shown in the following graphs respectively. SS SS a. b. A) b, a, b, c, and a B) c, a, d, c, and a C) b, a, d, d, and a D) b, a, d, c, and a

Answer 1

The increased tax benefits from saving would encourage more people to increase their saving. This will cause the supply of loanable funds to increase (shift to the right.) The equilibrium interest rate will fall. b

More consumption will cause the supply of loanable funds to decrease (shift to the left) The equilibrium interest rate will rise. a

An increase in corporate taxes will reduce the amount available for consumption and will cause the demand of loanable funds to decrease (shift to the left) The equilibrium interest rate will rise. d

The increase in expected future profits will encourage businesses to increase capital expenditure resulting in higherdemand for borrowing to finance this new capital expenditure. This will cause the demand curve in the loanable funds market to increase shifting the curve to the right. The result will be an increase in the equilibrium interest rate. c

The increase in budget deficit will reduce Public (Govt.) Saving causing the supply of loanable funds to decrease (shift to the left) and interest rates will go up. a

D) b,a,d,c, a

14) B)

16) A)
Govt. deficit = government purchases − (taxes − transfers)
this year = 80-(100-40) = 20

17) B)