Federal government shifts from taxing

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Savers are taxed on the nominal interest payments they receive rather than the real interest payments. Suppose the federal government shifts from taxing nominal interest payments to taxing only real interest payments. (That is, savers will be allowed to subtract the inflation rate from the nominal interest rate they receive and only pay taxes on the resulting real interest rate.) Use a market for loanable funds graph to analyze the effects of this change in tax policy. What happens to the equilibrium real interest rate and the equilibrium quantity of loanable funds? What happens to the level of saving and investment?

Reference no: EM131023219

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