Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium
A)interest rates and the equilibrium quantity of loanable funds rise.
B)interest rates rise and the equilibrium quantity of loanable funds fall.
C)interest rates fall and the equilibrium quantity of loanable funds rise.
D)interest rates and the equilibrium quantity of loanable funds fall.

Question

Quizplus · Accepted Answer

Taxing interest income reduces the after-tax return to saving, leading to a decrease in the supply of loanable funds. This results in higher equilibrium interest rates and a lower equilibrium quantity of loanable funds.

Suppose a Country Has Only a Sales Tax