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

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.

Rahul Sunny answered 1 year ago

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