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Suppose that Congress is considering an investment tax credit, which subsidizes domesticinvestment.a. How does this policy affect national saving, domestic investment, net capital outflow, the interest rate, the exchange rate, and the trade balance?b. Representatives of several large exporters oppose the policy. Why might that be the case?
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Yi Chun Lin
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supposing that Congress is attempting to pass a bill which would subsidize domestic investment, We'd like to know what is going to happen to each of these following trade items if this were to pass. So if Congress subsidized domestic investment, what can we expect to happen to national saving domestic investment and capital outflow interest rate, exchange rate trade conferences. So when this policy of this, when this tax credit goes through, it's going to end up encouraging domestic investment, right? Because it's encouraging that borrowing of those funds. And considering that we're now seeing that increase in demand for low nable funds, we're going to see this pressure on this interest rate as a result of those funds. So we can expect that the interest rate is going to increase with this interest rate increasing. We can also see increased national savings. People save more when the interest rate is higher because they can earn more off of those savings, but also seeing this rise in the interest rate, we're going to see a decrease in our net capital outflow as well going further. This decrease in our net capital outflow is going to end up reducing the supply of dollars within this um foreign currency exchange market because we're not putting money out, there are net capital outflow has fallen, the money is staying domestic, and so we're going to see this decrease in supply of dollars and that decrease of supply of dollars is going to put this upward pressure on the real exchange rates. We're going to see the exchange rate increase as a result as well now, because we're seeing this reduced net capital output, where is seen as a result of that, a reduction in net exports as well, That's going to be our trade balance is going to decrease. So, and then domestic investment, obviously, that's going to increase. That's the whole purpose of the subsidized subsidizing the domestic investment is to increase it. So what we'd like to know here is why my large exporters oppose this. So now that we have all of the directions in which these items are going to change as a result of the subsidization, these large exporters are going to oppose it because they want the exports, right? And as we see here that our trade balance is actually decreasing, which means that the US is going to be exporting less than they're importing. But these large exporters obviously want to continue to export, so they're going to oppose it simply because that trade balance has fallen or net exports has decreased.
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