What happens to the demand for loanable funds

Reference no: EM13186036

1) An investment-tax credit provides businesses with a "credit" on their federal income-tax obligation that is proportional to the dollars spent on qualifying capital goods purchases during a given tax year. A 10% tax credit might work as follows. Consider the purchase of a new computer system for your company which costs $100,000. This investment would translate into a $10,000 credit (reduction) on taxes owed by the company at the end of the year. Thus a policy enacting an investment tax credit is expected to increase the demand for investment goods at every interest rate. What happens to the demand for loanable funds if there is an increase in the domestic demand for investment goods at every real interest rate?

2) Using the 3-graph model developed in chapter 14, consider first the impact on the demand for loanable funds. If businesses respond as expected to the investment-tax credit, what will happen to the demand for loanable funds? Given this, what, if any, change will there be in interest rates. If interest rates change, then what will the expected impact be on net capital outflow (net foreign investment)? A rise in the real interest rate causes net capital outflow (aka net foreign investment) to move in a negative direction. Think about this in the following way. As real interest rates in the US rise (relative to real rates in the rest of the world) the foreign demand for US assets rises. At the same time the US demand for foreign assets will fall because of the higher return available in the US. Both effects cause net foreign investment to move in a negative direction

Reference no: EM13186036

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