Indentify if the following statement is true or false, and explain. If consumption is given by...
Indentify if the following statement is true or false, and explain.
If consumption is given by C = a + b(Y − T) and investment is given by I = f − hr, then a tax cut has no effect on equilibrium investment in the long run in the loanable funds model.
Homework Answers
Answer : The answer is False.
Income = Consumption + Saving
=> Saving = Income - Consumption.
Here due to tax cut the T (tax) is deducted in consumption function. Due to tax cut the consumption expenditure falls which increase the savings. We know that,
Savings = Investment
As here savings increases due to tax cut hence investment will increase in long-run because savings is always equal to investment. This means that tax cut effect the long run equilibrium investment in loanable funds. Therefore, the given statement is false.
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