Suppose Congress institutes an investment tax credit.What would happen in the market for loanable funds?
A)The interest rate and investment would fall.
B)The interest rate and investment would rise.
C)The interest rate would rise and investment would fall.
D)None of the above is necessarily correct.

Question

Quizplus · Accepted Answer

The investment tax credit would increase the incentive for firms to invest in new projects, leading to an increase in the demand for loanable funds. The increase in demand for loanable funds would lead to an increase in the interest rate as lenders seek to earn higher returns on their savings. However, this increase in interest rates would also lead to an increase in saving and a decrease in consumption, reducing the availability of funds for investment. The net effect would be an increase in the interest rate and investment.

Suppose Congress Institutes an Investment Tax Credit