If the government were to decrease the tax on interest income there would be a rightward shift in the supply of loanable funds and an increase in investment.
Loanable funds are the total amount of money that individuals and organizations in an economy have chosen to set aside and lend to borrowers as an investment rather than use for their own needs. It is predicated on borrowing that loanable funds are in demand. The real interest rate and the number of loans made depend on how the supply of savings and the demand for loans interact.
The tax credit will motivate companies to invest more in brand-new facilities and equipment. The demand curve in the market for loanable funds will move to the right due to the demand for borrowing needed to pay for this additional capital investment. The equilibrium interest rate will rise as a result.
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