Question

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401k retirement accounts, increasing the extent to which people can delay their tax obligation. Show the effect by shifting the appropriate curve in the market for loanable funds.

Answer 1

Supply Demand Loanable Funds

This change in tax code shifts the supply curve rightwards leading to fall in the market interest rate as supply of money increases in the economy.

Answer 2

As the tax obligation has been delayed and people can now park more in their 401K accounts this will cause the supply of loanable funds to increase and cause the supply curve to shift rightwards and this causes a fall in the interest rates.