The impact on the real interest rate due to an increase in investment tax credits and a reduction in taxes on the return to saving can be analyzed through supply and demand in the loanable funds market.
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Investment Tax Credits: By increasing investment tax credits, the government is incentivizing businesses to invest more. This increased demand for funds for investment would push interest rates up.
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Reduced Taxes on Returns to Saving: Reducing taxes on the return to savings makes saving more attractive, which could increase the supply of loanable funds. This would generally put downward pressure on interest rates.
Given the simultaneous increase in investment (increased demand for funds) and the increase in supply of loanable funds (due to reduced taxes on saving returns), the overall effect on the real interest rate is uncertain, as the demand and supply effects oppose each other.
Thus, the correct choice is:
b. the impact on the real interest rate is indeterminate.