a. Suppose the government introduces a program of tax
credits to firms that increase their desired investment in
new physical capital. What is the effect on the equilibrium
interest rate, investment, and saving of this policy? Show
the effect of this policy in the diagram.
b. In part (a), the policy has led to a higher interest rate
higher investment by firms. Does this contradict our
discussion in this chapter about how firms’ desired
investment is negatively related to the interest rate?
Explain.
c. Now suppose the government introduces a program of
tax credits to households who save. What is the effect on
the equilibrium interest rate, investment, and saving of
this policy? Show the effect of this policy in the diagram.
d. In part (c), the policy has led to a lower interest rate and
higher saving by households. Does this contradict our
