Holding other factors constant, if Congress passes a 5% investment tax credit under which a firm receives $5 in tax refunds from the government for every $100 it spends on new capital equipment, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.
A)increase; increase
B)increase; decrease
C)increase; not change
D)decrease; increase

Question

Quizplus · Accepted Answer

The creation of an investment tax credit will make investors more inclined to invest and shift the demand for loanable funds to the right. This will increase the real interest rate and also increase national saving and investment.

Holding Other Factors Constant, If Congress Passes a 5% Investment