What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
A)The supply of loanable funds would shift rightward and investment would increase.
B)The supply of loanable funds would shift leftward and investment would decrease.
C)The demand for loanable funds would shift rightward and investment would increase.
D)The demand for loanable funds would shift leftward and investment would decrease.

Question

Quizplus · Accepted Answer

Decreasing the tax rate on interest income would increase the return on investment, encouraging individuals to save more and supply more funds to the market. This would shift the supply curve of loanable funds rightward. With more funds available, the interest rate would decrease, making it cheaper for businesses to borrow and invest, which would encourage investment and shift the demand for loanable funds rightward. The net effect would be an increase in investment.

What Would Happen in the Market for Loanable Funds If