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Handout7 - Lecture 7 Outline Laffer Curve Income Tax Rate...

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Lecture 7 Outline Laffer Curve: Income Tax Rate Reported Hours Worked Worker Income Tax Revenue per week Tax Rate Goods Demanded DWL Monetary Policy is all about affecting interest rates, and through interest rates, affecting aggregate demand. In order to discuss this, we need to build up a framework that incorporates interest rates and aggregate demand. Saving, Investment in the National Accounts
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Page 2 of 8 National Saving (S): National Saving (Equation): Private Saving: Public Saving: Market for Loanable Funds Market for loanable funds:
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Page 3 of 8 Crowding Out National Saving (Equation): Crowding Out:
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Page 4 of 8 It is important to distinguish between two types of investment: Economic investment : Financial investment : There are actually two major kinds of financial markets: 1. 2. Financial Intermediaries: 1. Banks: 2. Mutual Fund: Present Value (Time) Present value:
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Page 5 of 8 Compounding Example (Compounding): High yield savings account. $100 invested today at an interest rate of 10% a year for 10 years. Compounding (Equation): Present Value (Equation):
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