When the government subsidizes investement, such as with an investment tax credit, the subsidy often applies to only some types of investment. This question ask you to considerthe effects of such a change. Suppose there are two types of investment in the economy: business investment and residential investment. The interest rates adjust to equilibrate national savings and total investment, which is the sum of business investment and residential investment.
Now suppose that the government institutes an investment tax credit only for business investment.

a. how does this policy affect the demand curve for business investment? The demand curve for residential investment?

b. Draw the economy's supply and demand for loanable funds. How does this policy affect the supply and demand for loanable funds? What happens to the equilibrium interest rate?

c. Compare the old and the new equilibria. How does this policy affect the total quantity of investment? The quantity of business investment? The quantity of residential investment?

a. The corporate investment demand curve changes even though the subsidy increases the amount of profitable business possibilities for a given rate of interest. There is no change in the demand curve for house investments.

b. The overall curve of demand for expenditure in the economy changes, as it is the sum of investment from businesses and unaltered residential investments. It adds to an improvement in the actual interest rate.

c. The overall investment amount does not modify, as the inelastic provision of savings restricts it. Income tax credit results in an increase in income, while reimbursement for domestic investment declines. The higher amount implies residential capital falls (a change along the curve), whereas the shift from the corporate capital curve results in an increase of the same amount of corporate investment.