Question

Consider the market for loanable funds. Suppose that savers make deposits in savings accounts at banks. Initially, the interest earned on the savings deposits is taxed at a rate of 20%. If the tax rate on interest earned on savings deposits rises to 25% then the _______ will shift to the _______ causing the equilibrium interest rate to _______.

Answer 1

A: The supply of loanable funds curve

B: left

C: Increase

Step-by-step explanation:

If the tax rate on interest earned on savings deposits rises to 25% then the supply of loanable funds curve will shift to the left causing the equilibrium interest rate to slide upwards (or increase).

The supply curve for loanable funds slopes upwards from left to right. This means that when interest rates are high, lenders are more willing to lend more funds to investors and businesses. The intersection of the demand and supply curves for loanable funds creates the equilibrium interest rate.

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