Again the following graph depicts the market for loanable fu

Again, the following graph depicts the market for loanable funds. An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government repeals a previously existing investment tax credit. Shift the appropriate curve(s) on the following graph to show the impact of this policy.

Solution

The removal of investment tax credit decreases the incentive to borrow.

- Demand for loanable funds fall.

- Demand curve shifts to the left.

- Results in a lower interest rate and a lower quantity saved.

If a reform of the tax laws discouraged investment, the result would be low interest rates and lesser savings.

Therefore the interest rate would fall and level of investment would also fall.