Question

Consider the market for loanable funds. An investment tax credit lowers the tax bill for any firm that purchases new capital for investment. Suppose that the government expands the investment tax credit program giving higher tax breaks to businesses that decide to invest. The expansion of the investment tax credit will cause the _______ curve to shift to the _______ causing the equilibrium interest rate to _______.

Answer 1

The correct answer is loanable funds; right; increase.

Explanation:

An investment tax credit reduces the tax bill for any firm that purchases new capital for further investment.

If the government expands the investment credit and starts giving higher tax breaks to those firms that decide to invest, it will promote firms to increase investment.

This will further lead to an increase in the demand for loanable funds. As a result, the demand curve for loanable funds shifts to the right. This further causes the interest rate to increase.