LOANABLE FUNDS Billions of dollars Scenario 1 Suppose savers either buy bonds or make deposits...

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LOANABLE FUNDS Billions of dollars Scenario 1 Suppose savers either buy bonds or make deposits in savings accounts at banks Initially the interest income earned on bonds or deposits is taxed at a rate of 18 Now suppose there is a decrease in the tax rate on interest income from 18 to 14 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 spending to Scenario 2 An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period Suppose the government repeals a previously existing investment tax credit Shift the appropriate curve on the graph to reflect this change The repeal of the previously existing tax credit causes the interest rate to This change in spending causes the government to run a budget and the level of investment to Scenario 3 Initially the government s budget is balanced then the government significantly increases spending on national defense without changing taxes and the level of investment which national saving

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LOANABLE FUNDS Billions of dollars Scenario 1 Suppose savers either buy bonds or make deposits in savings accounts at banks Initially the interest income earned on bonds or deposits is taxed at a rate of 18 Now suppose there is a decrease in the tax rate on interest income from 18 to 14 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 spending to Scenario 2 An investment tax credit effectively lowers the tax bill of any firm that purchases new capital within some relevant time period Suppose the government repeals a previously existing investment tax credit Shift the appropriate curve on the graph to reflect this change The repeal of the previously existing tax credit causes the interest rate to This change in spending causes the government to run a budget and the level of investment to Scenario 3 Initially the government s budget is balanced then the government significantly increases spending on national defense without changing taxes and the level of investment which national saving