Asked by Vincent Zhang on Jun 10, 2024
Verified
Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium
A) interest rates and the equilibrium quantity of loanable funds rise.
B) interest rates rise and the equilibrium quantity of loanable funds fall.
C) interest rates fall and the equilibrium quantity of loanable funds rise.
D) interest rates and the equilibrium quantity of loanable funds fall.
Income Tax
A tax imposed by the government on the income earned by individuals and businesses within its jurisdiction.
Sales Tax
A tax levied on sales of goods and services, typically calculated as a percentage of the purchase price, paid by consumers at the point of sale.
Interest Rates
Charges applied on borrowed money or returns on invested capital, which vary based on the time, inflation, risk, and liquidity.
- Describe the role of taxation and government policies in affecting the loanable funds market.
- Explore the catalysts and outcomes of shifts in the supply and demand curves for loanable funds.
Verified Answer
DP
Davion ParkerJun 11, 2024
Final Answer :
B
Explanation :
Taxing interest income reduces the after-tax return to saving, leading to a decrease in the supply of loanable funds. This results in higher equilibrium interest rates and a lower equilibrium quantity of loanable funds.
Learning Objectives
- Describe the role of taxation and government policies in affecting the loanable funds market.
- Explore the catalysts and outcomes of shifts in the supply and demand curves for loanable funds.