Interest rates fall and investment falls.Which of the following could explain these changes?
A)The government goes from a surplus to a deficit.
B)The government repeals an investment tax credit.
C)The government replaces a consumption tax with an income tax.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

When the government repeals an investment tax credit, the cost of investment for firms increases, which causes a decrease in investment. This decrease in investment will likely lead to a decrease in interest rates due to a decrease in demand for credit. Therefore, both the decrease in interest rates and investment can be explained by the government repealing an investment tax credit. Option A does not explain the relationship between interest rates and investment. Option C may have some impact on the economy, but it does not directly explain the changes in interest rates and investment. Option D is incorrect because a change in government policies or economic conditions can always be a possible explanation for changes in interest rates and investment.

Interest Rates Fall and Investment Falls