In the market for loanable funds, the government reduces tax breaks for saving and increases the penalties for corruption. What changes should be expected in the market for loanable funds due to these events?

Question

Quizplus · Accepted Answer

Reducing tax breaks for saving decreases the incentive for saving, leading to a decrease in the supply of loanable funds, which increases the interest rate. Increasing penalties for corruption may reduce risky investments but its direct impact on the supply or demand for loanable funds is uncertain, hence the uncertainty about the change in the amount of borrowed funds.

In the Market for Loanable Funds, the Government Reduces Tax