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What would happen in the market for loanable funds if the governemnt increases the tax on interest income?

User Sunvic
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Answer: c. The supply of loanable funds would shift left.

Step-by-step explanation:

An increase on taxes on interest income will reduce the earnings of savers who are the suppliers of loanable income. Some of those savers will divest from savings and look for other forms of investment to make better earnings from.

This flight from savings will reduce the savings held in banks and therefore the supply of loanable funds will reduce as well which will shift the supply curve to the left.

User Willem Jiang
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