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Question
Microeconomics
Posted 9 months ago
Princess Buttercup has granted an investment tax credit in Florin.
How will the market for loanable funds be impacted and what will the effect be on the interest rate?
Choose 1 answer:
(A) The supply of loanable funds will increase; the interest rate will decrease
(B) The demand for loanable funds will decrease; the interest rate will not change
(c) The demand for loanable funds will increase; the interest rate will increase
D The supply of loanable funds will decrease; the interest rate will not change
(E) Both the supply and demand for loanable funds will increase; the effect on the interest rate is indeterminate
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Answer from Sia
Posted 9 months ago
Solution
a
Investment Tax Credit: An investment tax credit incentivizes firms to invest more by reducing their tax burden on new investments. This increases the demand for loanable funds as firms seek more capital to finance their investments
b
Demand for Loanable Funds: With the investment tax credit, the demand for loanable funds will increase. This is because firms will need more funds to take advantage of the tax credit and invest in new projects
c
Interest Rate Impact: As the demand for loanable funds increases, the equilibrium interest rate in the market for loanable funds will also increase. This is due to the higher competition among firms to obtain the available funds
Answer
(C) The demand for loanable funds will increase; the interest rate will increase
Key Concept
Investment tax credit increases demand for loanable funds
Explanation
An investment tax credit makes it cheaper for firms to invest, leading to an increased demand for loanable funds. As demand increases, the interest rate rises due to higher competition for the available funds.
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