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 right and investment would increase.
B) the supply of loanable funds would shift left and investment would decrease.
C) the demand for loanable funds would shift right and investment would increase.
D) the demand for loanable funds would shift left and investment would decrease.

Question

Quizplus · Accepted Answer

When the government decreases the tax rate on interest income, it increases the net return that lenders receive from lending out their funds. This makes saving and lending more attractive, so the supply of loanable funds would shift to the right. With more funds available for borrowing, the interest rate would decrease, making it cheaper for firms to take out loans and invest in new projects, which would cause investment to increase.

What Would Happen in the Market for Loanable Funds If