Suppose that interest rates and investment both rise. Which statement best explains these changes?
A) The government is running a larger deficit.
B) The government has instituted an investment tax credit.
C) The government has replaced the income tax with a consumption tax.
D) The government has reduced its deficit.

Question

Quizplus · Accepted Answer

An investment tax credit directly encourages firms to invest more by reducing their tax liability when they purchase new capital. This can lead to an increase in investment. Higher investment demand can push up interest rates as firms compete for available funds to finance their investments.

Suppose That Interest Rates and Investment Both Rise