The market for loanable funds and government policy The following graph shows the market for leanable finds. For each of the given scenarios, adjust the appropriate curve on the graph to help you complete the questions that follow Treat each scenario separately by resetting the graph to its original state before examining the effect of each individual scenaris. (Note: You will not be graded on any changes you make to the graph) 10 Demand Dand LOANABLE FUNDS (Bons of dolas) INTEREST RATE (Parent x MZ A B O Scenario 1: Individual Retirement Accounts (IRAS) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 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 in the relevant time period. Suppose the previously existing investment tax credit. government repeals a p Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing 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.
