How does a decrease in the tax rate on income earned on saving affect saving, investment, the interest rate, and economic growth?
What will be an ideal response?
One determinant of the amount of household saving is the interest rate or the after-tax rate of return that households earn on the amount that they save. The higher the rate of return, the more the household will save. Individuals care about the rate of return that they earn from saving after taxes. Decreasing the tax rate on income earned from saving will increase the after-tax return from saving.
Since the after-tax rate of return rises for every dollar invested, the supply of loanable funds will increase, shifting the curve for loanable funds to the right. If the supply curve for loanable funds shifts to the right, this will lower the interest rate. As the interest rate declines, more investment projects become profitable. Firms will respond by increasing the amount of investment. This will raise the amount of capital available per worker. As the capital-to-labor ratio increases, so does labor productivity and growth in the economy.
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To the extent that high incomes can be attributed to very high demand for very scarce abilities, the labor supply effects of a substantial increase in the tax rate
a. will be zero as long as the labor supply curve is vertical. b. will be significant because the demand curve is fixed. c. cannot be predicted because the substitution and income effects offset each other. d. will be zero as long as there is no economic rent in the income.
If a person had increasing marginal utility, then the decline in utility from losing $1,000 would be greater than the increase in utility from gaining $1,000
a. True b. False Indicate whether the statement is true or false