depends negatively on the interest rate, and saving equals investment. How does and increase in the money supply that lowers the interest rate and thereby increases investment also increase saving? It would seem that with the lower interest rate, saving would be lower. What is going on? 5. Suppose a family wants a smooth consumption profile and does not wish to leave a bequest. Indicate how each of the following factors would affect the magnitude of the marginal propensity out of a temporary change in income. a.The size of the temporary income change. b.The length of the family’s planning horizon. c.The rate of interest. 6. Suppose that the President and the Congress agreed to raise personal income taxes by $100 billion per year starting in 2014 in an attempt to reduce the budget deficit by 2016. However, the legislation actually increased taxes only until 2016; starting in 2017, taxes would automatically be lowered back down by $100 billion, what would be the effect of this tax increase on consumption demand? Use the forward-looking theory of consumption to explain what the impact of the tax increase would be.