During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would shift

Question

a. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right.
b. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left.
c. the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right.
d. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.

Answer 1

To analyze the effects of a tax credit for investment projects, we need to consider the impact on loanable funds and the market for foreign currency exchange.

1. Effect on Demand for Loanable Funds: A tax credit for investment projects would incentivize firms to invest more. This increased investment leads to a higher demand for loanable funds as firms seek financing to fund these projects. Therefore, the demand for loanable funds shifts to the right.

2. Effect on Supply of Dollars in the Foreign-Currency Exchange Market: If firms invest more, they may need to acquire foreign goods or services, which can lead to an increased supply of domestic currency in exchange for foreign currency, thus shifting the supply of dollars in the market for foreign-currency exchange to the right as well.

Given these analyses:

• The demand for loanable funds would shift right.
• The supply of dollars in the market for foreign-currency exchange would also shift right.

Thus, the correct answer is:

a. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right.