Question

Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate

a. and investment both would increase.

b. and investment both would decrease.

c. would increase and investment would decrease.

d. would decrease and investment would increase.

Answer 1

d. would decrease and investment would increase.

Step-by-step explanation:

In a free market mechanism where investment is equal to savings in aggregate level, and interest rate is the consequence of supply and demand of savings, a change in income tax rules would incentivize people to increase the level of savings. An increase in savings would decrease the interest rate