Suppose the federal government is concerned about long-run economic growth. Suppose many lawmakers watched Robert Gordon's...

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Economics

Suppose the federal government is concerned about long-runeconomic growth. Suppose many lawmakers watched Robert Gordon's TEDtalk and are worried that the U.S. will not experience significantgains in productivity in the future. To combat this, the governmentenacts a tax credit to encourage firms to develop new technologiesthat can increase labor productivity. What this means is that iffirms undertake large research and development projects thegovernment will reimburse them for some of their expenses. At thesame time, the government makes interest earned on savings taxexempt. Instead of having to pay income taxes on interest earned onsavings accounts, interest income is now tax free.
Using the market for loanable funds illustrate the impact thatthese two new policies will have on the real interest rate and thelevel of savings and investment in the macroeconomy. In addition,please explain why you shifted any curves that you did.

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The goverment enacts the tax credit This induces firms toinvest in newer research and technology and since they arereimbursed for some of the investments that they do the firms areencouraged See Answer

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