Use the following to answer questions :
Exhibit: Saving, Investment, and the Interest Rate 2
-(Exhibit: Saving, Investment, and the Interest Rate 2) 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 there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy) ?

Question

Use the following to answer questions :
Exhibit: Saving, Investment, and the Interest Rate 2

-(Exhibit: Saving, Investment, and the Interest Rate 2) 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 there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy) ?

Quizplus · Accepted Answer

The correct answer is A because a decrease in investment demand will shift the investment curve to the left, leading to a new equilibrium at a lower real interest rate (r2) and lower levels of saving (S2) and investment (I2).

Use the Following to Answer Questions