In the loanable funds model, a reduction in the investment tax would create an Group of answer choices excess demand of funds at the initial equilibrium interest rate. This excess demand would lead to a rise in the interest rate. excess demand of funds at the initial equilibrium interest rate. This excess demand would lead to a fall in the interest rate. excess supply of funds at the initial equilibrium interest rate. This excess supply would lead to a rise in the interest rate. excess supply of funds at the initial equilibrium interest rate. This excess supply would lead to a fall in the interest rate.

When there is a reduction in the tax on investment, there will be more investment made by firms. For investment they will demand more loanable funds. therefore the demand for funds will increase and the demand curve will shift to the right. At the initial interest rate there will be excess demand which will encourage the borrowers to raise the rate of interest.

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