Question

Due to the recent reduction in corporate income tax rates, we can expect investment spending to _____ and the equilibrium interest rate to ____, all else the same.

a. increase : decrease
b. decrease : decrease
c. decrease : increase
d. increase : increase

Answer 1

Due to the recent reduction in corporate income tax rates, we can expect investment spending to increase and the equilibrium interest rate to decrease, all else being the same.

Step-by-step explanation:

The recent reduction in corporate income tax rates will lead to an increase in investment spending and a decrease in the equilibrium interest rate, all else being the same.

When corporate income tax rates are lowered, businesses have more after-tax profits available to invest. This increase in investment spending will lead to an increase in aggregate demand and economic growth. As a result, the equilibrium interest rate in financial markets will decrease.