If income tax rates were lowered,then
A) the interest rate on municipal bonds would fall.
B) the interest rate on Treasury bonds would rise.
C) the interest rate on municipal bonds would rise.
D) the price of Treasury bonds would fall.

Question

Quizplus · Accepted Answer

When income tax rates are lowered, the after-tax income of individuals increases which can make municipal bonds more valuable. This increased demand for municipal bonds can lead to an increase in their prices and a corresponding decrease in their interest rates. Therefore, the interest rate on municipal bonds would rise. The interest rate on Treasury bonds is not directly impacted by changes in income tax rates, so option B is incorrect. Option A is also incorrect because lower income tax rates could actually increase the demand for municipal bonds, leading to lower interest rates. Option D is incorrect because the price of Treasury bonds is negatively correlated with interest rates, meaning that if interest rates rise, the price of Treasury bonds will fall, but it is not directly influenced by changes in income tax rates.

If Income Tax Rates Were Lowered,then