ECON 1BB3 Lecture Notes - Tax Credit, Government Budget Balance, Comparative Statics

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Published on 12 Apr 2013
School
McMaster University
Department
Economics
Course
ECON 1BB3
Richard Damra Monday, February 4, 2013
Econ 1BB3 Chapter 8
Is a government budget deficit bad for the economy?
Review
Demand: Negative relationship between investment and the interest rate.
Supply: Positive relationship between saving and the interest rate.
Government borrowing will affect the supply not demand
Shift Factors
Demand
o Anything that affects investment (other than the interest rate)
o When interest changes the demand curve stays where it is and we move along that
stationary demand curve we call that change in Qd(Quantity demanded) of loan able
funds.
Supply
o Anything that affects private savings (other than the interest rate)
o Anything that affects public saving
o Investment tax credit is put in place to encourage investment causing demand for loan
able funds to increase. If taken away demand for loan able funds decrease
Comparative statics examples
In the following cases, use a market diagram to show what happens to the demand and/or
supply curves
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Document Summary

Demand: negative relationship between investment and the interest rate. Supply: positive relationship between saving and the interest rate. Government borrowing will affect the supply not demand. Supply: anything that affects private savings (other than the interest rate, anything that affects public saving. Investment tax credit is put in place to encourage investment causing demand for loan able funds to increase. If taken away demand for loan able funds decrease. In the following cases, use a market diagram to show what happens to the demand and/or supply curves. An improvement in technology causes firms to increase investment in capital goods. Investment increases(i: r increases , savings increases(s, private savings(sp) increases, public savings (sg) no change, private saving depends on interest rate public does not. Taxes and government spending are completely independent of the interest rate. The government replaces the income tax with a consumption tax; total taxes are unchanged: supply of loan able funds will be affected and they will.

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