What would happen in the market for loanable funds if the government were to increase the tax on interest income?
A)Interest rates would rise.
B)Interest rates would be unaffected.
C)Interest rates would fall.
D)The effect on the interest rate is uncertain.

Question

Quizplus · Accepted Answer

Increasing the tax on interest income for lenders would decrease the net return they receive on their investment. As a result, lenders would be less willing to supply funds in the loanable funds market. The decrease in the supply of loanable funds would cause the equilibrium interest rate to rise.

What Would Happen in the Market for Loanable Funds If