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

Answer 1

would decrease and investment would increase.

Step-by-step explanation:

In macroeconomics, total savings = total investment. If the government found a way to replace income tax with a consumption tax so that savings were not taxed, then total savings would increase.

The interest rate is basically the price of money, and the price of money is determined by the supply and demand of money. People who save money are the suppliers and investors are the consumers. If the total supply of money increases, since savings increase, then the supply curve will shift to the right. That rightward shift will increase total money supplied and decrease the price of money at every level of quantity demanded. So the new equilibrium price will be lower.

As a result, total investments will increase while the interest rate (price of money) will decrease.

Answer 2

Answer: a decrease in interest rate and investment will increase.

Step-by-step explanation:

If government replaces the income tax with a consumption tax and the interest on savings was not taxed, this would lead to a reduction in interest rate and investments will also increase.

Since the interest on savings are not taxed, there'll be a decrease in interest rate and this will lead to investors investing more in the economy as investors can go to banks to borrow money at a lower interest rate which can be used for investment purposes.