If the government increases investment tax credits and reduces taxes on the return to saving at the same time ?
Correct answer: C. the impact on the real interest rate is indeterminate
- A. the real interest rate should fall
- B. the real interest rate should rise
- C. the impact on the real interest rate is indeterminate
- D. the real interest rate should not change
Explanation
An investment tax credit increases the demand for loanable funds, tending to raise the real interest rate, while a lower tax on saving increases its supply, tending to lower the rate. Since these forces work in opposite directions, the net effect is indeterminate.
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