Question

Assume the economy of Ucheland is currently at full employment. The government of Ucheland reduces the tax rate on household interest earnings.

a. What will happen to private savings in Ucheland?
b. Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in private savings identified in part (a) on the equilibrium real interest rate.

Answer 1

a) since the tax rate oh household interest earnings increases, the number of households that will save money will increase, and the households that were already saving money might increase the amount saved. As a result, private savings will increase in Ucheland.

b) see attached image