Suppose that a country has only a sales tax.Now suppose it replaces the sales tax with an income tax that includes a tax on interest income.This would make equilibrium

Question

Quizplus · Accepted Answer

By implementing an income tax on interest income, the return on lending money will decrease, causing lenders to demand higher interest rates to maintain their return. As a result, borrowers will be less likely to borrow at the higher interest rates, leading to a decrease in the quantity of loanable funds. Therefore, equilibrium interest rates will increase, and the quantity of loanable funds will fall.

Suppose That a Country Has Only a Sales Tax