Policy that lowers nominal interest rate:

Rationale

Investment tax credit increases economic growth by raising MPS.

Investment tax credits encourage businesses to invest in capital, which can lead to increased savings in the economy. This increase in saving raises the marginal propensity to save (MPS), allowing for more funds to be available for investment, thus promoting economic growth.

A (cut income taxes) YOUR ANSWER

Shifting the Production Possibilities Curve (PPC) inward indicates a reduction in an economy's capacity to produce goods and services, reflecting inefficiencies or declining resources. An investment tax credit is designed to incentivize production and investment, which would shift the PPC outward, not inward.

B (deficit-financed spending) YOUR ANSWER

While an investment tax credit can ultimately lead to increased long-run aggregate supply (LRAS) by promoting more capital investment, the immediate effect of the tax credit is not a direct shift of LRAS. The increase in capital can contribute to LRAS growth over time, but the correct answer focuses on the immediate impact on MPS.

C (open-market purchase) CORRECT

Lowering the marginal propensity to consume (MPC) would imply that consumers are spending less of their additional income, which is counterproductive to economic growth. An investment tax credit generally encourages spending and investment rather than reducing consumption propensity.

D (raise discount rate) YOUR ANSWER

By encouraging businesses to invest rather than consume, an investment tax credit effectively raises the marginal propensity to save (MPS). This increase in saving enhances the amount of funds available for investment, which is crucial for long-term economic growth.

Conclusion

Investment tax credits serve as a powerful tool for promoting economic growth by incentivizing savings and investments. By raising the marginal propensity to save, these credits enable capital formation that supports sustained economic expansion. Other options, such as shifting the PPC or LRAS, do not accurately reflect the immediate effects of investment tax credits on the economy.

Policy that lowers nominal interest rate:

Investment tax credit increases economic growth by raising MPS.

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