from a supply/demand side, I assume that the supply of savings would move inward if the gov lower taxes on profit resulting in an increase in the deficit. Am I correct in my thinking?

Question

from a supply/demand side, I assume that the supply of savings would move inward if the gov lower taxes on profit resulting in an increase in the deficit. Am I correct in my thinking?

Answer 1

Hummmmm. I don't think so.

The supply of savings is a relationship between interest rates and the amount of money people are willing to save. Now then, why would savings decrease as a result of the policy change?

What would you do, savings wise, if the government lowered your taxes?

I would think that if government cut taxes, people would have more disposable income and therefore would INCREASE their savings.

Now then, the supply of savings is also the supply of loanable funds. An increase in government deficits, means an increase in the demand for loanable funds.