The Bush tax cut reduced the top income tax bracket from 39% to 35% over a ten-year period. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

Question

Quizplus · Accepted Answer

The Bush tax cut had the effect of increasing demand for financial assets, which includes municipal and Treasury bonds. With higher demand, the price of these bonds increased and led to a decrease in their interest rate. However, the decrease in the top income tax bracket would also decrease the supply of bonds as wealthy investors would seek to invest in other areas with better returns, which would lead to an increase in interest rates on Treasury bonds. The net effect would be a higher interest rate on municipal bonds and a lower interest rate on Treasury bonds, as predicted by choice A.

The Bush Tax Cut Reduced the Top Income Tax Bracket