tailieunhanh - Ten Principles of Economics - Part 56

Ten Principles of Economics - Part 56. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 25 SAVING INVESTMENT AND THE FINANCIAL SYSTEM 569 3. .and raises the equilibrium quantity of loanable funds. Figure 25-2 An Increase in the Supply of Loanable Funds. A change in the tax laws to encourage Americans to save more would shift the supply of loanable funds to the right from S1 to S2. As a result the equilibrium interest rate would fall and the lower interest rate would stimulate investment. Here the equilibrium interest rate falls from 5 percent to 4 percent and the equilibrium quantity of loanable funds saved and invested rises from 1 200 billion to 1 600 billion. billion to 1 600 billion. That is the shift in the supply curve moves the market equilibrium along the demand curve. With a lower cost of borrowing households and firms are motivated to borrow more to finance greater investment. Thus if a change in the tax laws encouraged greater saving the result would be lower interest rates and greater investment. Although this analysis of the effects of increased saving is widely accepted among economists there is less consensus about what kinds of tax changes should be enacted. Many economists endorse tax reform aimed at increasing saving in order to stimulate investment and changes would have much effect on national saving. These skeptics also doubt the equity of the proposed reforms. They argue that in many cases the benefits of the tax changes would accrue primarily to the wealthy who are least in need of tax relief. We examine this debate more fully in the final chapter of this book. POLICY 2 TAXES AND INVESTMENT Suppose that Congress passed a law giving a tax reduction to any firm building a new factory. In essence this is what Congress does when it institutes an investment tax credit which it does from time to time. Let s consider the effect of such a law on the market for loanable funds as illustrated in Figure 25-3. First would the law affect supply or demand Because the tax credit would reward .

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