Suppose government does not allow households to deduct their mortgage interest expenses from their income tax anymore.How this change is represented in the loanable funds model?

Question

Quizplus · Accepted Answer

When households are not allowed to deduct their mortgage interest expenses from income tax anymore, they will have a lower after-tax income, which reduces the amount of money they can save. This reduces the supply of loanable funds, and therefore, the supply curve shifts to the left. However, the demand for loanable funds remains constant because the investment decisions of firms are not affected by the change. Therefore, the demand for funds curve does not shift.

Suppose Government Does Not Allow Households to Deduct Their Mortgage