In the loanable funds model,an increase in an investment tax credit would create a
A)shortage at the former equilibrium interest rate.This shortage would lead to a rise in the interest rate.
B)shortage at the former equilibrium interest rate.This shortage would lead to a fall in the interest rate.
C)surplus at the former equilibrium interest rate.This surplus would lead to a rise in the interest rate.
D)surplus at the former equilibrium interest rate.This surplus would lead to a fall in the interest rate.

Question

Quizplus · Accepted Answer

An increase in an investment tax credit would increase the demand for loanable funds, shifting the demand curve to the right. This would result in a new equilibrium at a higher interest rate and a larger quantity of loanable funds exchanged. At the former equilibrium interest rate, there would be a shortage of loanable funds, as the quantity demanded would be greater than the quantity supplied. This shortage would push the interest rate up, as borrowers would be willing to pay more to obtain funds. Therefore, choice A is the correct answer.

In the Loanable Funds Model,an Increase in an Investment Tax