Question

Other things held constant, following an increase in the effective tax rate on capital, the real interest rate _____ and desired national savings _______
a. rises; declines
b. rises; increases
c. falls; declines
d. falls; increases
e. remains the same; remains the same

Answer 1

Answer:

b. rises; increases

Explanation:

Other things held constant, following an increase in the effective tax rate on capital, the real interest rate rises and desired national savings increases. If tax rate is reduced on capital then it implies that there will be more capital investment and hence more demand for funds. This is going to shift the demand curve to the right which will increase the rate of interest as well as desired savings.