Question

In: Economics

Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. Which of the following accurately describes the effect of an investment tax credit?

2. Problems and Applications Q2

Suppose that Congress is considering an investment tax credit, which subsidizes domestic investment. Which of the following accurately describes the effect of an investment tax credit?

Check all that apply.

Real interest rate increases

Net capital outflow decreases

Exchange rate decreases

Trade balance increases

National saving increases

Domestic investment decreases

As a result of the investment tax credit, domestic goods will become (more or less) expensive for foreigners to purchase.

Solutions

Expert Solution

A tax credit is an amount of money that taxpayers can subtract from taxes owed to their government. In such situation following will be the effect:

  • Real interest rate decreases
  • Net capital outflow decreases
  • Exchange rate increases
  • Trade balance increases
  • National saving decreases
  • Domestic investment increases
  • As a result of the investment tax credit, domestic goods will become (more or less) expensive for foreigners to purchase because exchange rate increases so domestic goods are costlier for foreigners.

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