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A tax law change that successfully encourages saving will interest rates, which leads to investment and economic growth. To better understand how changes in tax laws can affect saving, suppose that Amira, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Amira's parents are so impressed with her plans that they offer to pay her an additional 35% interest per month on the money she saves, which means that Amira is now earning a large rate of return on her saving. By the end of the summer, it turns out that Amira saved only $450 (before the interest paid by her parents) from her job. This means that the effect must be smaller than the effect for Amira in this case.

A tax law change that successfully encourages saving will interest rates, which leads to investment and economic growth. To better understand how changes in tax laws can affect saving, suppose that Amira, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Amira's parents are so impressed with her plans that they offer to pay her an additional 35% interest per month on the money she saves, which means that Amira is now earning a large rate of return on her saving. By the end of the summer, it turns out that Amira saved only $450 (before the interest paid by her parents) from her job. This means that the effect must be smaller than the effect for Amira in this case.

Exploring Economics
Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter21: Financial Markets, Saving, And Investment
Section: Chapter Questions
Problem 9P
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6. Tax systems and saving 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. INTEREST RATE LOANABLE FUNDS S D A tax law change that successfully encourages saving will D S ? interest rates, which leads to investment and economic growth. To better understand how changes in tax laws can affect saving, suppose that Amira, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Amira's parents are so impressed with her plans that they offer to pay her an additional 35% interest per month on the money she saves, which means that Amira is now earning a large rate of return on her saving. By the end of the summer, it turns out that Amira saved only $450 (before the interest paid by her parents) from her job. This means that the effect must be smaller than the effect for Amira in this case.
Transcribed Image Text:6. Tax systems and saving 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. INTEREST RATE LOANABLE FUNDS S D A tax law change that successfully encourages saving will D S ? interest rates, which leads to investment and economic growth. To better understand how changes in tax laws can affect saving, suppose that Amira, a rising third-year in college, plans to save $550 from her summer job in order to buy textbooks for the upcoming fall semester. Amira's parents are so impressed with her plans that they offer to pay her an additional 35% interest per month on the money she saves, which means that Amira is now earning a large rate of return on her saving. By the end of the summer, it turns out that Amira saved only $450 (before the interest paid by her parents) from her job. This means that the effect must be smaller than the effect for Amira in this case.
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