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Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter26: Savings,Investment And The Financial System

Section: Chapter Questions

Problem 5QR

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This question addresses the impact of saving on an economy by examining what happens if tax laws change to induce saving and how changes in tax laws can discourage saving.

The following graph shows the market for loanable funds.

Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or both.

A tax law change that successfully encourages saving will (increase/decrease) interest rates, which leads to (less/more) investment and economic growth.

To better understand how changes in tax laws can affect saving, suppose that Madison, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Madison's parents are so impressed with her plans that they offer to pay her an additional 30% interest per month on the money she saves, which means that Madison is now earning a large rate of return on her saving. By the end of the summer, it turns out that Madison saved $600 (before the interest paid by her parents) from her job. This means that the (income/substitution) effect must be bigger than the (income/substitution) effect for Madison in this case.

Show the impact of a change in the tax law that successfully encourages saving by shifting either the demand curve (D), the supply curve (S), or
both.
INTEREST RATE
LOANABLE FUNDS
S
D
D
S
(?)

Definition Definition Increase in the amount of goods and services produced by a country in a given period of time compared to an earlier period. Economic growth is generally coupled with a rise in national income or the purchasing power of individuals. It is often measured in terms of the increase in a country's gross domestic product (GDP), or the overall monetary value of all the complete or final services and goods that a country can produce within its domestic boundaries in a specific period.

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