Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at depository institutions. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%.

This change causes savers to supply __(less or more)_ loanable funds. Because the quantity of loanable funds supplied is now __(greater than or less than)__ the quantity of loanable funds demanded, there is __(downward or upward)__ pressure on interest rates. This change in interest rates causes a(n) __(decrease or increase)__ in the quantity of loanable funds demanded.

Market for Loanable Funds LOANABLE FUNDS