Please review this document prepared by the Congressional Research Service “The

Question

Please review this document prepared by the Congressional Research Service “The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law” available at https://fas.org/sgp/crs/misc/R45092.pdf Use the information cited in the reading) and your knowledge of supply and demand to answer the following questions. You need to put 2 citations from the document in each of a. and b. below justifying some change in the market indicated. Be sure to cite by page number and by copying and pasting the language from the document when creating your answers.

a. Other things being equal, what is the impact of the tax reform on the nation’s housing market, i.e. the market for single family homes?

b. Other things being equal, what is the impact of the tax reform on the financial markets where borrowers and lenders interact? If you don’t want to use a general “loanable funds model approach” identify one particular lending market or any device that links borrowers to lenders. You cannot use the mortgage market.

Explanation / Answer

A) OTHER THINGS BEING EQUAL, WHAT IS THE IMPACT OF THE TAX REFORM ON THE NATION’S HOUSING MARKET, I.E. THE MARKET FOR SINGLE FAMILY HOMES?

Pricing of loan able funds without a proper rationale or framework leads to uncertainty and unpredictability on the incidence of the next or expected interest rate. The uncertainty and unpredictability lead to high interest rates to cover for any eventual loss. High interest rates may lead to high cost of capital, low investment, reduction in aggregate supply of goods and services and a vicious circle that reduces economic growth. It also reduces credit availability and increase the risk of speculation and adverse selection

          First, among homeowners with capital gains between $0 and $500,000, TRA97 increased the semiannual sales rate by 0.40–0.62 percentage points on average after TRA97, or 19–24% from the pre-TRA97 baseline levels. Internal Revenue Code also featured preferential tax treatment for older home sellers before TRA97. The Warren Group. As a result, it is very different from the 1987–2008 data set and only has information on parcel address, sales date, sales price, buyer name, and seller name. Moreover, it is unclear whether these sales records are exhaustive and whether the transaction was on a single-family house.

B) OTHER THINGS BEING EQUAL, WHAT IS THE IMPACT OF THE TAX REFORM ON THE FINANCIAL MARKETS WHERE BORROWERS AND LENDERS INTERACT? IF YOU DON’T WANT TO USE A GENERAL “LOANABLE FUNDS MODEL APPROACH” IDENTIFY ONE PARTICULAR LENDING MARKET OR ANY DEVICE THAT LINKS BORROWERS TO LENDERS. YOU CANNOT USE THE MORTGAGE MARKET.

Financial instruments, markets and firms influence saving rates, investment decisions, technological innovations and long-run economic growth rates. From a functional perspective, financial systems perform five basic functions that have been highlighted in the finance and growth literature (see, for example, Levine 1997). Namely, they

(1) Facilitate the trading, hedging, diversifying and pooling of risk,

(2) allocate financial resources among competing users,

(3) monitor managers and exert corporate control,

(4) mobilize savings in all the geographical areas they serve,

(5) Facilitate the exchange of goods and services.

The performance of these functions then affects economic growth by increasing the incentives for capital accumulation and technological innovation. In their day-to-day activities, the firms and individuals within financial systems can be observed advising clients, structuring and arranging deals, providing finance to borrowers and equity issuers, and managing the funds and investments of individuals and so-called institutional clients.

The Securities Industry Association (2007) lists the factors as follows:

• Open and fair financial markets;

• Free flow of capital and a convertible currency;

• Skilled workforce/flexible labor laws;

• Prevalent use of a globally familiar language;

• A fair, transparent and efficient legal and regulatory regime;

• A sound and fair tax regime;

• Implementation of international standards and best practices;

• Low cost of doing business;

• High-quality, reliable and appropriate physical infrastructure;

• A stable political and economic environment.

This implies that countries wanting to foster the emergence of highly developed world-class financial systems must find ways to create environments which have these characteristics

The market for loan able funds shows the interaction between borrowers and lenders that helps determine the market interest rate and the quantity of loan able funds exchanged.

The market for loan able funds consists of two actors, those loaning the money (savings from households like us) and those borrowing the money (firms who seek to invest the money). Those loaning the money are the suppliers of loan able funds, and would like to see a higher return on their savings. This means that higher interest rates are going to motivate people to either start saving, or save more. This is why there is a positive relationship (upward trend) between the loan able funds and the real interest rate for the supply of loan able funds curve.

Let’s say that the government decides to increase government purchases, which will increase the demand for loan able funds. This will shift the demand curve right, resulting in a higher interest rate and a higher quantity of loan able funds. The magnitude of the shift right is the increase in the amount of government purchases a movement from Q* to Q’ (if all of it is borrowed). The difference between the new Q’’ and Q’ shows much private investment is crowded out due to the idea of crowding out theory (that firms invest less when the government runs a deficit).

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.