Suppose the law changes such that individuals can contribute twice as many dollars per year to...

Suppose the law changes such that individuals can contribute twice as many dollars per year to their Individual Retirement Accounts and avoid paying taxes on this money until they retire. This will cause a shift in the [ Select ] ["supply of", "demand for"] funds curve and as a result the equilibrium interest rate will [ Select ] ["increase", "decrease"] .

Suppose the law changes and the corporate income tax rate has been cut in half. As a result we can expect a shift in the [ Select ] ["supply of", "demand for"] funds curve and as a result the equilibrium interest rate will [ Select ] ["increase", "decrease"] .

Suppose both of these changes happen at the same time. As a result we can expect the equilibrium interest rate to [ Select ] ["increase", "decrease", "uncertain"] and the equilibrium quantity of funds supplied and demanded to [ Select ] ["increase", "decrease", "uncertain"] .

Expert Solution

1) Supply of, decrease. This is because now people will save more and this will results in increasing the supply of loanable funds. As the supply curve shifts to the right there is an increase in quantity of funds and a decrease in interest rate. (This will cause a shift in the supply of funds curve and as a result the equilibrium interest rate will decrease)

2) Demand for, increase. Since businesses will now deposit less tax, they have incentives to invest more. This will increase the demand curve to the right. As a result, funds demanded and supplied are increased and rate of interest is also increased. (As a result we can expect a shift in the demand for funds curve and as a result the equilibrium interest rate will increase)

3) Uncertain, increase. (As a result we can expect the equilibrium interest rate to be uncertain and the equilibrium quantity of funds supplied and demanded to increase)

Rahul Sunny answered 4 weeks ago

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