Thursday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 9 The Real Economy in the Long Run
Chapter 26 of 36 Saving, Investment, and the Financial System
Section 20 of 25
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Figure 2 - Saving Incentives Increase 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.
The equilibrium interest rate falls, from 5 percent to 4 percent
The lower interest rate stimulates investment.
The equilibrium quantity of loanable funds saved and invested increases from $1,200 billion to $1,600 billion.
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Three government policies that affect the economy's saving and investment:
Policy 1: saving incentives
Policy 2: investment incentives
Policy 3: government budget deficits and surpluses
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Policy 1: saving incentives, continued.
Let's consider the effect of a tax reduction on savings on the market for loanable funds, per Figure 2.
One way this could happen is if the amount we can put tax-free in IRA and 401k plans is increased.
We analyze this policy following our three steps
1 - determine whether the policy shifts the supply curve or the demand curve
2 - determine the direction of the shift
3 - determine how the equilibrium changes using the supply-and-demand diagram
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First, determine whether the policy shifts the supply curve or the demand curve.
Because the tax reduction on savings would alter the incentive for households to save at any given interest rate the quantity of loanable funds supplied would be affected.
The supply of loanable funds will shift.
The demand for loanable funds would be unchanged.
This is because the tax change would not directly affect the amount borrowers want to borrow at any given interest rate.
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Second, determine the direction of the shift.
Because saving would be taxed less than under current law households would increase their saving and decrease their consumption the supply of loanable funds would increase.
The supply curve shifts to the right from S1 to S2.
Amount of supply of loanable fund increases from $1200 to $1600 billion.
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Third, determine the new supply-and-demand intersection equilibrium point.
The S2 increased supply of loanable funds
· reduces the interest rate from 5% to 4%
· quantity of loanable funds demanded rises from $1200 to $1600 billion
· the equilibrium point moves right and down from point A to point B
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households and firms are incentivized
kakei ya kigyō ni insentibu ga ataerareru
家計や企業にインセンティブが与えられる
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In Figure 2 lowering taxes on savings decreases the interest rate from 5 to 4 percent and increases business investment. Why not have zero taxes on savings? ChatGPT:
Lowering taxes on savings increases the supply of loanable funds, reduces interest rates, and encourages more business investment, as the graph shows.
But having zero taxes on savings would be difficult because governments still need revenue to fund its spending needs.
Ending taxes on savings would eliminate 5~10% of federal government tax revenues.