An increase in the tax on capital income ________ the supply of loanable funds and ________ investment.

Question

Quizplus · Accepted Answer

By increasing the tax on capital income, the return on investment decreases, which leads to a decrease in the supply of loanable funds since investors have less incentive to save and invest. Additionally, decreasing the supply of loanable funds will lead to an increase in interest rates, further deterring investment. Therefore both the supply of loanable funds and investment decrease.

An Increase in the Tax on Capital Income ________ the Supply