Between 2000 and 2005, Finland increased its tax on interest income. As a result, the supply curve for loanable funds shifted ____________and the tax wedge____________ .

Question

Quizplus · Accepted Answer

When the tax on interest income increases, the return on investment decreases, which reduces the incentive to save. This causes the supply of loanable funds to decrease, shifting the supply curve leftward. Additionally, the tax wedge refers to the difference between the before-tax and after-tax return on an investment. With an increase in tax, the tax wedge increases.

Between 2000 and 2005, Finland Increased Its Tax on Interest