If the government instituted an investment tax credit, then which of the following would be higher...
If the government instituted an investment tax credit, then which of the following would be higher in equilibrium?
a. saving and the interest rate
b. saving but not the interest rate
c. the interest rate but not saving
d. neither saving nor the interest rate
Homework Answers
Ans.- saving and the interest rate
Investment tax credit is simply a tax incentive offered to businesses in order to encourage them to invest more. They let individuals or businesses deduct a certain percentage of investment costs from their taxes.
So, investment will increase but investment will increase only if saving is also increased . An increase in saving means a reduction in consumption. A reduction in consumption shifts IS curve to the left hence leading to a rise in interest rate.
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