Final answer:
The tax code change allowing more money in 401(k) accounts results in an increased supply of loanable funds, depicted as a rightward shift in the supply curve. This typically leads to a new equilibrium with a lower real interest rate and higher quantity of loanable funds in the market.
Step-by-step explanation:
The market for loanable funds represents the interactions between borrowers and savers. When the government changes the tax code to allow more money to be placed in 401(k) retirement accounts, it affects the supply side of the market. Specifically, increasing the amount people can save tax-deferred in their 401(k) accounts usually leads to a rise in the savings rate, which in turn increases the supply of loanable funds.
This change can be depicted as a rightward shift in the supply curve (So) in the market for loanable funds. The new equilibrium, after the supply curve has shifted, will generally result in a lower real interest rate and a higher quantity of loanable funds in the market compared to the initial equilibrium. This is because the increased supply of funds makes it cheaper for people and businesses to borrow money.
For example, in the scenario where the original equilibrium interest rate was 5%, the increased supply of funds could lead to a new equilibrium with a lower interest rate of, let's say, 4.5%, and a greater quantity of loanable funds than before. This demonstrates how fiscal policy impacts financial markets and the economics of private investment.