In a given year in Demandland, a new law is passed that gives individuals tax breaks...

In a given year in Demandland, a new law is passed that gives individuals tax breaks if they put a higher than average amount of their income into savings accounts at banks. Meanwhile, new federal regulations aimed at improving environmental standards were updated to require much higher efficiency ratings from all industrial machines, with the penalty for firms that don’t replace inefficient machines being large fines. We would expect what to happen in the market for loanable funds:

a. Quantity to fall and the interest rate to fall.

b. Quantity to rise and the interest rate to rise.

c. Quantity to fall and the interest rate rise.

d. Quantity to rise and the change in the interest rate to be unclear.

Expert Solution

Quantity will rise on account of higher supply in form of higher savings ,leading to more loanable funds with the banks and interest is difficult to predict on account of higher supply in form of higher savings at one point while because of regulation this will also cause higher demand at the other end.option d is correct

Rahul Sunny answered 2 years ago

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