An increase in the marginal tax rate would likely increase the demand for municipal bonds,and decrease the demand for U.S.government bonds.

Question

Quizplus · Accepted Answer

When the marginal tax rate increases, investors tend to look for tax-exempt investments such as municipal bonds to reduce their tax liability. As a result, the demand for municipal bonds increases. On the other hand, an increase in the marginal tax rate reduces the after-tax return on taxable investments such as U.S. government bonds, thereby reducing the demand for them.

An Increase in the Marginal Tax Rate Would Likely Increase