Scenario 1: Individual Retirement Accounts (IRAs) allow workers to shelter a portion of their income from taxation. Suppose the maximum annual contribution to accounts of this type is $6,000 per person. Now suppose there is an increase in the maximum contribution, from $6,000 to $9,000 per year.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to .
Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period. Suppose the government implements a new investment tax credit.
Shift the appropriate curve on the graph to reflect this change.
The implementation of the new tax credit causes the interest rate to and the level of saving to .
Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes.
This change in spending causes the government to run a budget , which national saving.
Shift the appropriate curve on the graph to reflect this change.
This causes the interest rate to , the level of investment spending.