In 1995, MP Bill Gatt proposed that the income tax be replaced with a consumption tax. If his program had been passed, how would the equilibrium interest rate and the quantity of loanable funds have been affected?
A) The equilibrium interest rate and quantity of loanable funds would be lower.
B) The equilibrium interest rate and quantity of loanable funds would be higher.
C) The equilibrium interest rate would be higher, and the equilibrium quantity of loanable funds would be lower.
D) The equilibrium interest rate would be lower, and the equilibrium quantity of loanable funds would be higher.

Question

Quizplus · Accepted Answer

Replacing income tax with a consumption tax encourages savings over consumption. This increase in savings would lead to an increase in the supply of loanable funds, which would lower the equilibrium interest rate and increase the equilibrium quantity of loanable funds.

In 1995, MP Bill Gatt Proposed That the Income Tax