2016 AM Mock Question 9A - Economics Help

CFA Level III
#1

Ok, Economics is not my strongest subject so please could some give me a simple explanation to the question/answer below.

For Question 9 A i) how does “increase in the maximum tax deductible amount for employee contributions to retirement plans” INCREASE growth from capital inputs?

I get that it leads to more savings, however doesn’t this lead to reductions in capital available in the economy (less spending)?

Thanks,

#2

MORE savings = MORE reinvestment into capital inputs as retirement savings are generally invested across a range of assets including shares, bonds, infrastructure etc…

#3

Look it through Cobb Douglas. Increase in savings level increases aggregate capital level ready to be invested. Thus, incentives for retirement savings positively affect capital factor in growth equation. It cannot lead to capital reduction because Pension funds as intermediaries invest savings mostly into Government or Corporate bonds or equities.

#4

Thanks! got it!

#5

Doesn’t this mean less taxes too? which contracts the economy?