Reference no: EM132282123

1.The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, which allows Canadians to earn tax-free investment returns on a limited amount of savings each year. In theory, and all else remaining equal, what do we expect the effect of such a policy to be on the market for financial capital?

There will be no effect on the market for financial capital.

The investment demand curve shifts left, the equilibrium interest rate falls and investment falls.

The supply of saving curve shifts left, the equilibrium interest rate rises and investment decreases.

The supply of savings curve shifts right, the equilibrium interest rate falls and investment increases.

The investment demand curve shifts right, the equilibrium interest rate rises and investment rises.

2.Consider the flow of investment and saving in a small economy. Suppose the equilibrium interest rate is 2.5% and the equilibrium level of saving and investment is $4 billion. Now suppose, all else remaining equal, that there is sustained population growth over several years. What will be the effect in the capital market?

An increase in the flow of investment and saving and an increase in the equilibrium interest rate.

An increase in the flow of investment and saving and a decrease in the equilibrium interest rate.

An indeterminate effect on the flow of investment and saving and a decrease in the equilibrium interest rate.

An increase in the flow of investment and saving and an indeterminate effect on the equilibrium interest rate.

An indeterminate effect on the flow of investment and saving and an increase in the equilibrium interest rate.

3.Ongoing technological improvement over the past four decades in Canada has led to continual increases in investment demand, and an increase in the flow of investment, but no clear trend in the interest rate. The reason that we have not seen continual increases in the interest rate over this time period is that

the government intervenes in the capital market.

the annual flow of investment is large enough to offset any change in the interest rate.

the supply of saving curve shifts to the left in response to the increases in investment demand.

natural forces in the economy cause the investment demand curve to shift left to eliminate the excess demand for capital.

technological change has also led to rising productivity and rising incomes and therefore an increase in the supply of saving.