hw4 - ECON103A Discuss Session Grace Waner Gu T &...

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ECON103A Discuss Session Fri, Nov 2nd Grace Waner Gu wgu002@student.ucr.edu 1) CH3: i).PA11: When the gov’t subsidizes investment, such as with an inverstment tax credit, the subsidy often applies to only some types of investment. This question asks you to consider the effect of such a change. Suppose there are two types of investment in the economy: business investment and residential investment. And suppose that the gov’t institutes an investment tax credit only for business investment. a). How does this policy affect the demand curve for business investment? The demand curve for residential investment? b). Draw the economy’s supply and demand for loanable funds. How does this policy affect the supply and demand for loanable funds? What happens to the equilibrium interest rate? c). Compare the old and the new equilibrium. How does this policy affect the total quantity of interest? The quantity of business investment? The quantity of residential investment? a) The demand curve for business investment shifts out because the subsidy increases the number of profitable investment opportunities for any given interest rate. The demand curve for residential investment remains unchanged. b). The total demand curve for investment in the economy shifts out since it represents the sum of business investment, which shifts out, and residential investment, which is unchanged. As a result the real interest rate rises. c). The total quantity of investment does not change because it is constrained by the inelastic supply of savings. The investment tax credit leads to a rise in business investment. But an offsetting fall in residential investment. That is, the higher interest rate means that residential investment falls (a shift alon the curve), whereas the outward shift of the business investment curve leads business investment to rise by an equal
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This note was uploaded on 07/06/2009 for the course ECON 103a taught by Professor Suen during the Fall '08 term at UC Riverside.

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hw4 - ECON103A Discuss Session Grace Waner Gu T &...

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