Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is an increase in the maximum contribution, from $5,000 to $8,000 per year.
(a) This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to _ and the level of investment spending to _.
(b) An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit.
The repeal of the previously existing tax credit causes the interest rate to _ and the level of investment to _.
(c) Initially, the government's budget is balanced, then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes.
This change in spending causes the government to run a budget _, which _ national saving.
This causes the interest rate to _, and the level of investment spending to _.
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