Newb MacroEcon question

[gezuz]

Sup all. So I have this take home quiz due, and there's one question I don't know. It goes as follows:

The model of the market for loanable funds shows that an investment tax credit will cause interest rates to rise and investment to rise. Yet according to the theory of demand, we argue that higher interest rates lead to lower investment. how can these 2 conclusions be reconciled? Illustrate on a graph and explain.

So I understand that the demand for loanable funds increases raises interest rates, but I don't get how to reconcile the two. How does the law of demand get counteracted? Anyone got an answer for me?

Thanks for the help.

[tabako]

I'm not sure exactly what they mean by "investment tax credit", but perhaps think of this as a fiscal policy change (would decrease G or increase T). This fiscal change, along with the investment function changing (there is more incentive to invest because of the tax credit, I would assume), you should be able to get an increase of both I and r.

Sorry I don't have a more exact answer, but maybe thinking about it in this way will help you get to the right answer.

[gezuz]

yeah, an investment tax credit is basically a tax cut on investing. Interest rates will rise because demand rises, but investment rises as well because of the tax cut. the law of demand says investment should decrease though. Right now I'm thinking that the rising interest rates counteract the tax cut until a new equilibrium is reached?

[Thremp]

One effect is larger than the other.