Question

Assume the loanable funds market in our economy is at its equilibrium point. Please graphically demonstrate the effects of the two following government policies on the loanable funds market.

Policy 1: Government decides to lower the tax rate on interests received from saving accounts
Policy 2: Government decides to lower the corporate tax rate for firms that purchase new tools to improve their working efficiency.

Answer 1

Lowering the tax rate on interest received from saving accounts increases the supply of loanable funds, lowering the interest rate and increasing the quantity of loanable funds. Lowering the corporate tax rate for firms that purchase new tools to improve working efficiency increases the demand for loanable funds, increasing the interest rate and the quantity of loanable funds.

Step-by-step explanation:

In the loanable funds market, the equilibrium interest rate and quantity of funds loaned and borrowed are determined by the intersection of the demand and supply curves. Policy 1, lowering the tax rate on interests received from saving accounts, would increase the supply of loanable funds. This would shift the supply curve to the right, resulting in a lower equilibrium interest rate and a higher equilibrium quantity of loanable funds.

Policy 2, lowering the corporate tax rate for firms that purchase new tools to improve working efficiency, would increase the demand for loanable funds. This would shift the demand curve to the right, resulting in a higher equilibrium interest rate and a higher equilibrium quantity of loanable funds.