The interest rate tax wedge ________ the quantity of savings and investment and ________ the growth rate of real GDP.

Question

Quizplus · Accepted Answer

The interest rate tax wedge is the difference between the before-tax and after-tax interest rates. When this tax wedge increases, it reduces the incentives for individuals to save and invest, leading to a decrease in the quantity of savings and investment. As a result, economic growth slows down because investments are necessary for the creation of capital, technology, and other productive inputs.

The Interest Rate Tax Wedge ________ the Quantity of Savings