A decrease in the tax on capital income ________ the real interest rate and ________ investment and economic growth.

Question

Quizplus · Accepted Answer

When the tax on capital income decreases, the after-tax return on investment increases, causing an increase in investment. As a result, the increase in investment increases the demand for loanable funds, which will lead to an increase in the real interest rate. The increase in investment and real interest rate will then result in an increase in the economic growth.

A Decrease in the Tax on Capital Income ________ the Real