14 Due to the current monetary and political environment the

14 Due to the current monetary and political environment, there is a significant increase in tax rates on interest. According to the loanable funds theory, what impact does this increase in interest tax rates have on interest rates and the quantity of money (Hint: think from the perspective of taxes on interest and deductibility of interest payments) Select one: a. The interest rate decreases and the impact on the quantity of funds is ambiguous b. The interest rate decreases and the quantity of funds increases c. The interest rate decreases and the quantity of funds decreases d. The interest rate increases and the quantity of funds decreases e. The interest rate increases and the impact on the quantity of funds is ambiguous

Solution

Answer : d. The interest rate increases and the quantity of funds decreases

=> This is because interest tax decreases the interest incidence for lender, who ultimately increases the interest rates. Due to increase in interest rates, the quantity of amount on interest decreases, being expensive funding.