Answer to Question #105014 in Macroeconomics for TaQuoria

Question

Assume that the federal government passes an investment tax credit law that encourages firms to invest more. How would this change impact the market for loanable funds? What happens to the interest rate and the quantity of loanable funds at equilibrium. How would this affect overall investment in the economy (I in Y = C + I + G + NX)?

Answer 1

The tax credit encourages businesses to spend more on new machines and factories. The demand for borrowing to finance this new capital expenditure will cause the demand curve in loanable funds market to shift to the right. The result will be an increase in equilibrium interest rates. When government cut taxes, disposable income increases. This will translate to higher spending and increased production thus increasing GDP of a given country.