The real interest rate declines, as do domestic investment, national saving, the exchange rate, and net capital outflow.
Spending money today in the pursuit of future growth is what it means to invest. An investment is the use of capital—such as time, money, labor, etc.—with the goal of generating a higher return than the initial investment.
Businesses are encouraged to invest thanks to the investment tax credit.
They allow taxpayers to subtract a certain amount of investment expenses. These credit are in supplementary to customary depreciation allowances.
This essentially lowers borrowing costs at all real interest rates. Since there will be more demand for money, effective interest rates will go up as a result.
Real interest rates rising now will reduce net capital outflow.
Falling net capital flows diminish the amount of dollars available on the foreign exchange market, raising the actual exchange rate.
Due to the high dollar value of exports, there will be a decline in the trade balance, which will result in trade deficits.
Due to people saving greater amounts as a result of the high interest rates, national savings decline.
Less money will be invested domestically.
Due to everything that was said below, national items will cost extra to buy for foreigners.
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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.
