Question

Suppose that the government changes the tax code to allow additional amounts of money to be placed in 401(k) retirement accounts, increasing the extent to which people can delay their tax obligations. Show the effect by shifting the appropriate curve in the market for loanable funds.

Answer 1

Answer:

*see image*

Explanation:

As the tax obligation has been delayed and people can now park more in their 401K accounts this will cause the supply of loanable funds to increase and cause the supply curve to shift rightwards and this causes a fall in the interest rates.

The new law that is described will result in an increase in the supply of loanable funds, meaning that the supply curve should shift to the right.

In this case, the supply curve shows how the amount of money that savers are willing to loan varies with the interest rate. Making more money eligible for the tax benefits that are associated with 401(k) retirement accounts will induce higher levels of saving, which will lead to more funds being available.