An increase in the tax on capital income _______ the supply of loanable funds and _______ investment.

Question

Quizplus · Accepted Answer

An increase in the tax on capital income decreases the supply of loanable funds because it reduces the after-tax return on savings, making saving less attractive. This decrease in the supply of loanable funds leads to higher interest rates, which in turn decreases investment as borrowing costs rise.

An Increase in the Tax on Capital Income _______ the Supply