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if the government instituted an investment tax credit, then which of the following would be higher in equilibrium? a. the interest rate but not saving b. neither saving nor the interest rate c. saving and the interest rate d. saving but not the interest rate



Answer :

If the government instituted an investment tax credit, then saving and the interest rate would be higher in equilibrium.

  • Investment tax credits are merely a type of tax incentive provided to businesses to encourage them to increase their investments. They permit taxpayers to deduct a predetermined percentage of investment expenses for either individuals or businesses.
  • Therefore, investment will increase, but only if saving also increases. Increased saving equals less consumption. The IS curve is shifted to the left by a decrease in consumption, which raises interest rates.
  • A tax credit is a dollar amount that taxpayers can deduct from the taxes they must pay. Tax credits lessen the amount of real tax due, as opposed to deductions, which increase the amount of taxable income.

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