To analyze the effect of an investment tax credit in the loanable funds market for a closed economy, we need to consider how this credit would affect the demand and supply of loanable funds.
An investment tax credit typically encourages more investment by businesses, which increases the demand for loanable funds. This shift in demand would move the demand curve to the right, leading to a higher equilibrium interest rate and a higher quantity of loanable funds traded.
Given this understanding, let's evaluate the answer options:
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Option a: decrease to $80 and the interest rate to rise to 7% (point E).
- This suggests both a decrease in quantity and unusual movement of interest rates, likely incorrect.
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Option b: increase to $160 and the interest rate to fall to 4% (point D).
- This suggests an increase in quantity but a decrease in the interest rate, which contradicts typical expectations from an increase in demand.
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Option c: increase to $160 and the interest rate to rise to 7% (point C).
- This indicates an increase in the quantity of loanable funds and an increase in the interest rate, aligning with the expected outcome of a higher demand due to investment tax credits.
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Option d: decrease to $80 and the interest rate to fall to 4% (point B).
- This suggests both a decrease in quantity and a decrease in interest rate, which does not fit the scenario of increased demand.
Therefore, the most appropriate answer is:
c. increase to $160 and the interest rate to rise to 7% (point C).
1 answer