What will be the effect of an increase in business taxes on the quantity of inve

Question

What will be the effect of an increase in business taxes on the quantity of investment by firms and the economy's capital stock in the future? The quantity of investment will decrease and the economy's future capital stock will increase. The quantity of investment will increase and the economy's future capital stock will increase. The quantity of investment will increase and the economy's future capital stock will decrease The quantity of investment will decrease and the economy's future capital stock will decrease.

Explanation / Answer

An increase in business tax will discourage investment, since return on investment will now be lower (Since tax will be higher, net income will be lower).

So, demand for loanable funds (quantity of loanable funds) will decrease, and this will decrease the equilibrium interest rate.

A decrease in investment will lower the future stock of capital (since investment builds the capital stock, lower investment will lower future capital stock).

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