Suppose that interest rates fall and investment falls. Which statement best explains these changes?
A) The government went from a surplus to a deficit.
B) The government has repealed an investment tax credit.
C) The government has replaced a consumption tax with an income tax.
D) The government is allowing limited nontaxable savings deposits.

Question

Quizplus · Accepted Answer

When interest rates fall, firms and individuals can borrow money more cheaply which should increase investment. However, if the government repeals an investment tax credit, this will decrease the incentive to invest despite lower interest rates. Therefore, a fall in interest rates and a fall in investment could be explained by the repeal of an investment tax credit.

Suppose That Interest Rates Fall and Investment Falls