Question

If an investment tax credit is introduced to give a tax advantage to any firm building a new factory or buying a new piece of equipment, which of the following statement is correct in a loanable fund market?

A. Investment increases & savings decrease.

B. Investment increases & savings increase.

C. Investment decreases & savings decrease.

D. Investment decreases & savings increase.

E. None of the above is correct.

Answer 1

An investment tax credit can be defined as a direct tax rebate of a certain percentage of the investment in a qualified asset or business.

As it has been given that if an investment tax credit is introduced to give a tax advantage to any firm building a new factory or buying a new piece of equipment.

It means this leads to more investment in a new factory or purchasing new machinery because, firms will get tax rebate benefits, so the cost of production decreases. Hence the profit will increase. Since investment will increases and investment is done from the saving, therefore the saving will decrease.

Hence option A is the correct answer.

A; Investment increases & savings decrease.