The impact of changing from a federal income tax to a federal consumption tax would be:?

Question

A. A decrease in the quantity of loanable funds exchanged and a decrease in the real interest rate

B. An increase in the quantity of loanable funds exchanged and an increase in the real interest rate

C. An increase in the quantity of loanable funds exchanged and a decrease in the real interest rate

D. A decrease in the quantity of loanable funds exchanged and an increase in the real interest rate

Answer 1

Income can be used for two things: consumption or saving.  An income tax taxes all income (including interest income), regardless of whether it is used for consumption.  A consumption tax only taxes that income which is used for consumption, so it encourages savings.  That would lead to an increase in the supply of loanable funds, since it is no longer being taxed.  Because of the increase in the supply curve, the price (real interest rate) falls.

C. An increase in the quantity of loanable funds exchanged and a decrease in the real interest rate

Answer 2

You are way more advanced about Economy Then I,  Looks like a very smart question, and  I don't know the answer.  I'm earmarking the question with a star, so I can come back to it later.  gimme a 2 points