Question

Everything else held constant, an increase in marginal tax rates would likely have the effect of ________ the demand for municipal bonds, and ________ the demand for U.S. government bonds.

A) decreasing; increasing
B) decreasing; decreasing
C) increasing; decreasing
D) increasing; increasing

Answer 1

C) increasing; decreasing

Everything else held constant, an increase in marginal tax rates would likely have the effect of increasing the demand for municipal bonds, and decreasing the demand for U.S.

Step-by-step explanation:

As the municipal bonds are tax-free their demand will increase as outstanding bonds are more attractive than similar bonds. While the corporate bond do pay taxes people will try to shift into other investment to avoid the taxation if possible. As this is possible moving into municipal bonds we wull se an increase in municipal bonds while a decrease in corporate bonds occurs.