Answer:
The question is incomplete, complete question is as follows:
Individual Retirement Accounts (IRAs) allow people to shelter some of their income from taxation. Suppose the maximum annual contribution to such accounts is $5,000 per person. Now suppose there is a decrease in the maximum contribution, from $5,000 to $3,000 per year.
Shift the appropriate curve on the graph to reflect this change.
This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to.
Explanation:
To decrease.
Saving is the basis of the loanable finance supply.
Decreasing the saving rates which families may shelter from income tax would deter saving on each interest rate, contributing to a change in the supply of loanable funds to the left.
The initial interest rate is due to a shortage of loanable funds. The lenders will also be able to increase the interest rate which they charge for loans with more inclined borrowers than lenders.
Whilst the interest rates increase, the quantity required for loanable funds is declining. The equilibrium interest rate is increasing, and the equilibrium amount of borrowed and invested loanable funds is decreasing.
Based on the fact that the maximum contribution has increased, the equilibrium interest rate will fall and investment spending will rise.
The original question asks for the effect of the increase in contribution on the interest rate and investment spending.
If there is an increase in the maximum amount that can be contributed from $5,000 to $8,000, people will save more money.
This will lead to a fall in interest rates because there is now more money saved with financial institutions which they can use to make loans.
A fall in interest rates will encourage investment because companies and individuals will borrow money knowing that they don't have to pay too much in interest.
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