Question

What effect would reducing income tax rates have on the interest rates of municipal​ bonds? A. Interest rates would rise because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. B. Interest rates would fall because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds. C. Interest rates would fall because Treasury securities are now less valuable and more people will want to hold municipal bonds. D. Interest rates would rise because Treasury securities are now less valuable and more people will want to hold municipal bonds.

Answer 1

A. Interest rates would rise because the reduction in income tax rates would make the​ tax-exempt privilege for municipal bonds less valuable and reduce the demand for municipal bonds.

Step-by-step explanation:

In the case when the income tax rate is decreased on the municipal bonds so here the interest rate would increase as there is a decrease in the income tax rate due to which there should be the tax-exempt for the municipal bonds also it is less valuable. In addition to this, it also decrease the municipal bond demand

hence, the correct option is A.