unts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is a decrease in the tax rate on interest income, from 20% to 15%. Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of saving causes the equilibrium interest rate in the market for loanable funds to fall and the level of investment spending to increase Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve on the graph to reflect this change. The repeal of the previously existing tax credit causes the interest rate tofall Correct and the level of investment tofall Correct . Points: 1 / 1 Open Explanation Explanation: Scenario 3: Initially, the government's budget is balanced; then the government significantly increases spending on national defense without changing taxes. This change in spending causes the government to run a budgetdeficit Correct , whichincreases Incorrect national saving. Points: 0.5 / 1 Shift the appropriate curve on the graph to reflect this change. This causes the interest rate tofall Incorrect ,crowding out Correct the level of investment spending.