Final answer:
Graphical analysis of the loanable funds market demonstrates that lowering the tax rate on savings increases the supply of loanable funds, leading to a lower interest rate, whereas lowering the corporate tax rate for investment increases demand, potentially raising interest rates.
Step-by-step explanation:
The effects of government policy on the loanable funds market. To graphically demonstrate the effects of these policies, we can use supply and demand curves in the loanable funds market diagram. Policy 1: Lowering the tax rate on interests from savings accounts is likely to encourage more savings, since savers keep more of their interest income. This increases the supply of loanable funds, shifting the supply curve (So) to the right (S1). This results in a lower equilibrium interest rate and an increase in the equilibrium quantity of loanable funds.
Policy 2: Lowering the corporate tax rate for firms purchasing new tools can increase investment demand as firms have greater incentive to invest. This shifts the demand curve (Do) for loanable funds to the right (D1), raising the equilibrium interest rate and also increasing the quantity of loanable funds at the new equilibrium. These actions in the loanable funds market can lead to different outcomes. A lower tax on savings may decrease interest rates and increase investment, while a lower corporate tax to incentivize purchasing new tools may increase interest rates if this policy shifts the demand for loanable funds significantly.