If Congress were to pass a law exempting interest on saving from taxation, the
A) supply of loanable funds would decrease and the equilibrium interest rate would rise.
B) supply of loanable funds would increase and the equilibrium interest rate would fall.
C) demand for loanable funds would increase and the equilibrium interest rate would rise.
D) equilibrium interest rate would be unaffected.

Question

Quizplus · Accepted Answer

If interest on savings is exempted from taxation, it would encourage people to save more, increasing the supply of loanable funds. This would cause the equilibrium interest rate to fall as borrowers would have more access to funds at a lower cost.

If Congress Were to Pass a Law Exempting Interest on Saving