Suppose in some country that the first $5,000 of interest income is exempt from income tax. if the government then removed this exemption

hello your question lacks the required options here are the options

a.the interest rate and investment would rise.

b.the interest rate would rise and investment would fall.

c.the interest rate and investment would fall.

d.the interest rate would fall and investment would rise.

Answer : The interest rate and investment would fall

Explanation:

If the Government removes the exemption of not taxing the first $5000 of interest income then the demand for  loanable funds would be reduced and therefore the supply of loanable funds will be greater than the demand hence the interest rate will fall.

Once the demand for loanable funds are reduced the rate of investment by investors will as well be affected hence investment would fall as well because no Investor will be willing to take out loans because of the tax imposed by the government.

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