In the graph you've just made, how does a tax on interest income influence the real interest rate and investment? A tax on interest income _______ loanable funds, which _______ the real interest rate and _______ investment.A. decreases the demand for; raises; decreasesB. decreases the supply of; raises; decreasesC. increases the supply of; lowers; increasesD. increases the demand for; lowers; increasesScreenshot attachedthanks We start with a loanable fundsmarket with no income tax.An income tax decreasesthe supply of loanable fundsand shifts the supply curveleftward to SLF + tax.The vertical distance betweenthe SLF curve and the SLF + taxcurve measures the incometax wedge.The demand for loanable fundscurve remains at DLF, theequilibrium real interest raterises to 8 percent. Investmentand saving decrease.ResetReal interest rate (percent per year)1210870620Before-taxinterestrate risesIncometax wedgeAfter-taxinterestrate falls0.5Decrease in supplyof loanable funds1.0SLF + taxEquilibriumInvestmentdecreasesSLFDLF1.52.02.53.0Loanable funds (trillions of 2012 dollars)

Equilibrium in the loanable funds market occurs at the intersection of demand and supply curves.

Answered: In the graph you've just made, how does…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In the graph you've just made, how does a tax on interest income influence the real interest rate and investment? A tax on interest income _______ loanable funds, which _______ the real interest rate and _______ investment.

A. decreases the demand for; raises; decreases

B. decreases the supply of; raises; decreases

C. increases the supply of; lowers; increases

D. increases the demand for; lowers; increases

Screenshot attached

thanks

We start with a loanable funds
market with no income tax.
An income tax decreases
the supply of loanable funds
and shifts the supply curve
leftward to SLF + tax.
The vertical distance between
the SLF curve and the SLF + tax
curve measures the income
tax wedge.
The demand for loanable funds
curve remains at DLF, the
equilibrium real interest rate
rises to 8 percent. Investment
and saving decrease.
Reset
Real interest rate (percent per year)
12
10
8
70
6
2
0
Before-tax
interest
rate rises
Income
tax wedge
After-tax
interest
rate falls
0.5
Decrease in supply
of loanable funds
1.0
SLF + tax
Equilibrium
Investment
decreases
SLF
DLF
1.5
2.0
2.5
3.0
Loanable funds (trillions of 2012 dollars)

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