Question

Consider the U.S. market for loanable funds in a closed-economy model. Answer the following questions about each scenario.The government increases the capital gains tax, which taxes earnings on assets in the stock market. This will shift the (Click to select) demand for loanable funds to the left supply of loanable funds to the left demand for loanable funds to the right supplyof loanable funds to the right , the interest rate and equilibrium amount of borrowing will (Click to select) increase and decrease respectively both increase decrease and increase respectively both decrease .

Answer 1

Answer:

supply of loanable funds to the left; increase and decrease respectively.

Explanation:

The increase in the capital gains tax will reduce, the savings as it axes earnings on assets in the stock market. This reduction in savings will cause the supply of loanable funds to decrease.  

This will further cause the supply curve for loanable funds to shift to the left. This leftward shift in the loanable fund's supply curve will cause the interest rate to increase and the equilibrium quantity of loanable funds to decrease.