Please Help me with Ap Macro Economics!!
Country X Economic Analysis
Country X is currently maximizing its resources and employment to produce consumer goods and capital goods. The government has a balanced budget.
(a) Production Possibilities Curve
Illustrate the economy of Country X on a fully labeled production possibilities curve, assuming increasing opportunity cost. Label a point where the economy is currently operating as point X.
(b) Impact of Tax Rate Reduction
The government of Country X reduces the tax rates for interest earned on household savings. Would the national savings decrease, increase, or stay the same? Explain.
(c) Loanable Funds Market
On a fully labeled loanable funds market graph, illustrate the impact of the policy from part (b) on the equilibrium real interest rate and the equilibrium quantity of funds.
(d) Short-Run Impact on Production Possibilities Curve
Assume that Country X is still maximizing resource use. On your PPC graph from part (a), illustrate the short-run impact of the change in real interest rates. Illustrate a new production point as point R.
(e) Long-Run Aggregate Supply
In the long run, will the long-run aggregate supply of Country X decrease, increase, or stay the same? Explain.
Country X Economic Analysis (a) Production Possibilities Curve (b) Impact of Tax Rate Reduction (c) Loanable Funds Market (d) Short-Run Impact on Production Possibilities Curve (e) Long-Run Aggregate Supply Point X represents the combination of consumer goods and capital goods that the economy is currently producing given its resources and technology. (b) The reduction of tax rates on interest earned on household savings will increase the return on savings and make saving relatively more attractive. As a result, households are likely to save more of their income, leading to an increase in national savings. The reduction in tax rates increases the supply of loanable funds (from S1 to S2) and reduces the equilibrium real interest rate (from r1 to r2). The equilibrium quantity of funds borrowed and lent increases from Q1 to Q2. (d) The change in real interest rates will affect the cost of borrowing and the return on saving, which will lead to changes in investment and saving decisions by firms and households. Assuming that Country X is still maximizing resource use, the change in real interest rates will affect the allocation of resources between consumer goods and capital goods production. If the interest rate decreases, capital goods become relatively cheaper, and firms will invest more in capital goods production. As a result, the economy will move along the PPC curve from point X to a new point R, which represents a higher level of capital goods production and a lower level of consumer goods production. (e) In the long run, the long-run aggregate supply (LRAS) of Country X is determined by the economy's resources, technology, and institutions, and it is not affected by changes in the real interest rate. Therefore, the LRAS of Country X will stay the same in the long run. However, the level of output that the economy can produce in the long run will depend on the level of investment in physical and human capital, which is affected by the real interest rate. If the economy invests more in capital goods production in the short run, it will have a higher level of capital and human capital in the long run, which will increase the LRAS of the economy over time.