If the government increases investment tax credits and reduces taxes on the return to saving at the same time, the:
A) real interest rate should fall.
B) real interest rate should rise.
C) impact on the real interest rate is indeterminate.
D) real interest rate should not change.

Question

Quizplus · Accepted Answer

The impact on the real interest rate is indeterminate because increasing investment tax credits would increase investment demand, potentially raising the real interest rate, while reducing taxes on the return to saving would increase the supply of savings, potentially lowering the real interest rate. The net effect depends on the relative magnitudes of these shifts.

If the Government Increases Investment Tax Credits and Reduces Taxes