If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate ________ and saving ________.

Question

Quizplus · Accepted Answer

Reducing the effective tax rate on capital typically encourages investment, which increases the demand for loanable funds, leading to a rise in the real interest rate. Additionally, the lower tax rate on returns to saving can incentivize individuals to save more, thus increasing saving.

If the Government Reduces the Effective Tax Rate on Capital