Which of the following would most likely happen in the market for loanable funds if the government were to decrease the tax on interest income?

Question

Quizplus · Accepted Answer

When the government decreases the tax on interest income, it increases the return on savings, which incentivizes people to save more. As a result, the supply of loanable funds (savings) increases, which leads to a decrease in the equilibrium interest rate. Lower interest rates make it cheaper for firms to borrow money for investment, which increases investment. Therefore, both investment and savings would rise as a result of this policy change.

Which of the Following Would Most Likely Happen in the Market