Question

Suppose the Australian government has announced tax cuts for the business sector. Using the loanable funds model, explain how this will impact the supply of and demand for loanable funds and the interest rate in Australia. (Explain your answer using diagrams)

Answer 1

Australian government has announced tax cut for the business sector and it would be leading to increase of the demand for the loanable funds because there will be a lower rate of interest in the economy due to tax cuts and it would be leading to increase of demand of the loanable fund and it would also mean that there would be a decrease in the supply of loanable funds.

it will also mean that the interest rates in the Australian economy is going to fall due to tax cut because there will be an impact of tax cuts on the interest rates and it is representative of easing fiscal policy which will be resulting into a easing monetary policy so it will ultimately lead to lowering the overall rate of interest in the economy which will increase the demand for the loanable funds and decrease the supply for the loanable funds. Lenders are refraining to lend at lower interest rate and borrower will be increasing their demand at low interest rate.