Question 10 Initially, there is a negative net capital outflow in a small open economy with...
Question 10 Initially, there is a negative net capital outflow in a
small open economy with a perfect capital mobility. Suppose an
investment tax credit is introduced to give a tax advantage to any
firm building a new factory or buying a new piece of equipment.
Which of the following statement is correct in the loanable funds
market?
A. Savings increase and investment increases.
B. Savings decrease and investment increases.
C. Savings increase and investment remains unchanged.
D. Savings remain unchanged and investment decreases.
E. None of the above is correct
Homework Answers
The relationship between savings, investment, and net capital outflow can be given by the identity: S = I + NCO
Now, NCO < 0
An investment tax credit makes investment more attractive for investors, Therefore I should increase. Foreigners also invest more, thus NCO becomes more negative. Therefore, savings may increase or decrease depending on the relative magnitudes of I and NCO. Therefore, Option e) is correct.
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Question 10 Initially, there is a negative net capital outflow in a
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