A decrease in marginal tax rates would likely have the effect of ________ the demand for municipal bonds and ________ the demand for U.S.government bonds.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing

Question

Quizplus · Accepted Answer

A decrease in marginal tax rates reduces the tax benefits of municipal bonds, which are tax-free, thus decreasing the demand for them. On the other hand, a decrease in marginal tax rates reduces the after-tax return on U.S. government bonds, making them less attractive and reducing demand for them. Therefore, the demand for municipal bonds would decrease and the demand for U.S. government bonds would increase.

A Decrease in Marginal Tax Rates Would Likely Have the Effect