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Exhibit: Saving, Investment, and the Interest Rate 1
-(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r₁, at which saving, S₁, equals desired investment, I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?

Question

Use the following to answer questions :
Exhibit: Saving, Investment, and the Interest Rate 1

-(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r₁, at which saving, S₁, equals desired investment, I₁. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?

Quizplus · Accepted Answer

The correct answer is A because a tax cut will increase disposable income, leading to an increase in saving and a decrease in desired investment. This will shift the saving curve to the right and the investment curve to the left, resulting in a new equilibrium at Point A, where the real interest rate is lower and saving and investment are both higher.

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