The diagram below show the market for financial capital assuming that national income is constant at potential GDP,Y*. FIGURE 25-2
-Refer to Figure 25-2.Suppose national saving is reflected by NS₀ and investment demand is reflected by I₀^D.Now suppose the government implements a revenue-neutral tax policy that encourages investment.What is the effect on the real interest rate?

Question

The diagram below show the market for financial capital assuming that national income is constant at potential GDP,Y*.

FIGURE 25-2
-Refer to Figure 25-2.Suppose national saving is reflected by NS₀ and investment demand is reflected by I₀^D.Now suppose the government implements a revenue-neutral tax policy that encourages investment.What is the effect on the real interest rate?

Quizplus · Accepted Answer

A revenue-neutral tax policy that encourages investment would lead to an increase in investment demand, which would shift the investment demand curve to the right from I₀^D to I₁^D. This would result in a higher equilibrium quantity of financial capital and a higher real interest rate, which would move from i* to i₂. National saving would stay unchanged at NS₀, as the tax policy is revenue-neutral and does not affect national saving directly.

The Diagram Below Show the Market for Financial Capital Assuming