An increase in the corporate profits tax is likely to cause
A)the equilibrium interest rate to rise and the equilibrium price of bonds to fall.
B)the equilibrium interest rate to fall and the equilibrium price of bonds to rise.
C)the equilibrium interest rate and the equilibrium price of bonds both rise.
D)the equilibrium interest rate and the equilibrium price of bonds both fall.

Question

Quizplus · Accepted Answer

An increase in the corporate profits tax reduces the after-tax profits of corporations, making them less attractive to investors. This leads to a decrease in demand for bonds, causing bond prices to fall. As bond prices fall, the interest rates, which move inversely to bond prices, rise.

An Increase in the Corporate Profits Tax Is Likely to Cause