Which of the following would most likely happen in the market for loanable funds if the government were to increase the tax on interest income?
A)Interest rates would rise.
B)Interest rates would be unaffected.
C)Interest rates would fall.
D)The change in the interest rate would be ambiguous.

Question

Quizplus · Accepted Answer

By increasing the tax on interest income, lenders would receive a smaller net return on their loans. This would lead to a decrease in the supply of loanable funds, causing interest rates to rise. Borrowers would be willing to pay higher interest rates to access the limited funds available for lending. Thus, the market for loanable funds would see an increase in interest rates due to the government's action.

Which of the Following Would Most Likely Happen in the Market