What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
A)There would be an increase in the amount of loanable funds borrowed.
B)There would be a reduction in the amount of loanable funds borrowed.
C)There would be no change in the amount of loanable funds borrowed.
D)The change in loanable funds is uncertain.

Question

Quizplus · Accepted Answer

Decreasing the tax rate on interest income would incentivize savers to save by offering higher after-tax returns on their savings. This, in turn, would increase the supply of loanable funds and decrease the equilibrium interest rate. With a lower interest rate, borrowers would be incentivized to borrow more funds, which would lead to an increase in the amount of loanable funds borrowed.

What Would Happen in the Market for Loanable Funds If