1. A tax change would alter the incentive of firms and households to save at a given rate. Savings would increase loanable fund and therefore shift the supply curve to the right, while the demand curve remains unchanged, supply curve shifts to the right would lower the interest rate.
An investment tax incentive such as what makes building new factories more attractive would have an impact on the demand of loanable fund. It raises the equilibrium quantity of loanable funds hence shift the demand curve to the right while the supply curve stays the same. So it would raise the equilibrium interest rate and therefore greater savings.
2. Treasure bill one-year yield rate is 0.95; Government of Canada Benchmark Bond Yield rate: 2 year1.50% ; 3 year1.25%; 5 year1.75%
One-year forward rates for year 2 and year 3
Two-year forward rate for year 4
3. Liquidity premium theory
The liquidity theory states that investors would only hold long-term maturities if they are offered at a premium to compensate the uncertainty in a security’s value. Since short-term securities provide less price risk and more marketibility than long-term securities, investors are more willing to hold short-term securities that can be converted to cash with little risk of capital loss. An upward-sloping may reflect investors’ expectations that future short-term rates will be flat,but with the liquidity premium increases with maturity, the yield curve will nevertheless be upward sloping therefore the future interest rates will probably fall. So just the upward-sloping does not mean the trend of economy is
