Question

The only province not currently collecting a sales tax is Alberta. What is a likely result from the recently elected government's proposal to reduce income taxes and introduce a sales tax? Answered the equilibrium interest rate would decrease and investment would increase. O b. The standard of living would eventually rise. O c The equilibrium interest rate and investment would both increase. d. The supply of loanable funds would shift left

Answer 1

The reduction in income taxes will result in an increase in disposable income of households.

On the other hand, introduction of sales tax will result in an increase in price of goods and services. This will adversely impact the demand for goods and services and will result in a decrease in consumption expenditure.

An increase in disposable income coupled with a decrease in consumption expenditure will boost savings.

So, there is an increase in savings.

Savings acts as source of supply of loanable funds.

This increase in savings will increase the supply of loanable funds.

Given the demand for loanable funds, this increase in supply of loanable funds will result in a decrease in equilibrium interest rate and an increase in quantity of loanable funds.

Thus,

The equilibrium interest rate would decrease and investment would increase.

Hence, the correct answer is the option (a).