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If the current income tax exemption on municipal bonds were abolished, what would happen to the...

If the current income tax exemption on municipal bonds were abolished, what would happen to the interest rate on municipal bonds? What effect would the change have on interest rates on U.S. Treasury securities? You must provide appropriate demand and supply graphs and explain your answer. Label the graphs properly.

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The elimination of tax exemption in municipal bonds leads to decrease in the interest rate on the municipal bonds. People will demand less because they end up getting less than before. People will shift their demand towards T-Bills because they possess tax exemption and that is why people will end up getting more than a municipal bond. The demand for the curve of the T-Bill will shift rightward and therefore the interest rate will fall.

The demand curve of a municipal bond will shift leftward and therefore interest rate and quantity decreases.

The demand curve of Treasury will shift rightward and therefore quantity and interest rate will rise.

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