Using a graph, explain what will happen to investment in Canada if the government reduces the...

Using a graph, explain what will happen to investment in Canada if the government reduces the corporate income tax, and households’ expectation of their future incomes become more uncertain.

Solutions

Expert Solution

This can be shown using loanable funds model.

If government reduces corporate income tax, firms will increase business investment, which increases demand for loanable funds. Demand curve of loanable funds will shift rightward, increasing interest rate and increasing quantity of loanable funds (saving and investment).

At the same time, household uncertainty over future expectation will increase current savings, increasing supply curve of loanable funds. Supply curve of loanable funds will shift rightward, decreasing interest rate and increasing quantity of loanable funds (saving and investment).

The net effect is a definite increase in quantity of loanable funds (saving and investment), but net effect on interest rate is uncertain.

In following graph, D0 and S0 are initial demand and supply curves of loanable funds, intersecting at point A with initial interest rate r0 and quantity of loanable funds (saving and investment) Q0. Due to higher demand and higher supply, D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with higher quantity of loanable funds (savings and investment) Q1 and new interest rate r1.

D0 shifts right to D1 and S0 shifts right to S1, intersecting at point B with higher quantity of loanable funds (savings and investment) Q1 and new interest rate r1.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the...

Using the AD-AS model, graph and explain what would happen to unemployment and inflation in the following situations. a) Assume the economy begins at potential output. Consumer confidence rises. What is the short run effect? b) Starting with the previous question, consumer confidence rises. What is the long run effect?

Explain, using an appropriate graph, why a tariff is an inefficient means to collect government revenue.

Assume that an increase in government expenditure causes a larger budget deficit. Explain what will happen...

Assume that an increase in government expenditure causes a larger budget deficit. Explain what will happen to the DD curve as a result. Explain what will happen to the AA curve as a result. Answer with graphs.

Using Aggregate Demand and Aggregate Supply depict what will happen should the government lower the personal...

Using Aggregate Demand and Aggregate Supply depict what will happen should the government lower the personal income tax rate. Using Aggregate Demand and Aggregate Supply depict what will happen should the Bank of Canada buy bonds in the open market. Using Aggregate Demand and Aggregate Supply depict what will happen should the government increase corporate income tax rates. Using Aggregate Demand and Aggregate Supply depict what will happen should the Bank of Canada lower the Bank Rate. (Rationalize and depict...

Explain how the Government of Canada finances its budget deficits.

Using the AD AS model, explain what will happen to the price level and real GDP...

Using the AD AS model, explain what will happen to the price level and real GDP if either the SRAS or AD curve shifts. You are told that 2 events take place and you must explain which curve shifts and in what direction.

What is a competitive labor market? What is a monopsony? Using an appropriate graph explain the...

What is a competitive labor market? What is a monopsony? Using an appropriate graph explain the effect of a minimum wage law on employment if the labor market is a monopsony.

Suppose that the government reduces corporate taxes, thereby increasing the net expected profit from investment projects...

Suppose that the government reduces corporate taxes, thereby increasing the net expected profit from investment projects run by businesses. Adjust the Supply and demand graph below to illustrate how this corporate tax cut affects the bond market.

1.What will happen to the price in this market in the long run? Draw a graph...

1.What will happen to the price in this market in the long run? Draw a graph of the entire market (all firms versus all consumers) to illustrate why this happens. a.What are the characteristics of a competitive market? b. With the market back at market equilibrium, what is the consumer response given that a single firm raises its price above the equilibrium price? c.If a firm finds out that there are a lot of consumers willing to buy the good...

1A-) Using the graph, explain what is meant by the Yield Curve and the forms it...

1A-) Using the graph, explain what is meant by the Yield Curve and the forms it takes? 2A-) By checking at it, do you think that this curve can be used as a future indicator for the performance of the economy?

Subjects