Suppose the Following Equations Give the Demand and Supply for Loanable

question 210

Essay

Suppose the following equations give the demand and supply for loanable funds in billions of dollars; r is the real interest rate in percentage points :
QD = 160 - 10r
QS = -20 + 20r
Now, assume the government wishes to stimulate consumption, and imposes a tax on interest earnings of 40 percent.
a) How do the demand and supply equations change to reflect the interest earnings tax?
b) Calculate the new equilibrium interest rate and quantity of loanable funds. (Compare this to the zero-tax equilibrium.)
c) Calculate the changes in consumer and producer surplus due to the tax. Who gains and who loses from the tax?

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Definitions:

Interest Calculations

The process of determining the amount of interest owed or earned over a specified period of time, based on a given rate and principal amount.

Merchandise

Goods available for sale in a retail or wholesale environment.

Journalize

The act of recording transactions in an accounting journal in chronological order.

Interest Expense

The cost incurred by an entity for borrowed funds, represented as an expense on the income statement.