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What do expect to happen to overall quantity of lending

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In the U.S., interest income is taxed. For simplicity, let's assume the tax rate to be 30%. Therefore, if you lend $100,000 to someone and get paid back $100,000 plus $10,000 interest (10% interest rate), you need to pay 30% × $10,000 =$3,000 to the IRS (you end up with $7,000 take-home interest income).

Problem i. Suppose the interest income tax rate suddenly increases (e.g. to 50%). What is the impact on the demand curve of lending? What is the impact on the supply curve?

Problem ii. Based on the supply-demand diagram , what do you expect to happen to the overall quantity of lending and the (pre-tax) interest rate in the market?

Reference no: EM132996191

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