Draw the graph · Macro · Loanable funds market
A tax on interest income
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Demand for loanable funds stays put. Supply of loanable funds shifts left.
The tax lowers what savers keep from any given interest rate, so saving is rewarded less. Households save less at every real interest rate, and the supply of loanable funds shifts left. Demand is unchanged. The higher interest rate moves borrowers up along their demand curve.
The real interest rate rises and fewer funds are borrowed.
Common mistake. Students sometimes shift demand left because 'the tax discourages borrowing.' The tax falls on lenders' income, not on borrowers. It is the supply of saving that shrinks.
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