Final answer:
Providing a new tax credit for business investment increases the demand for loanable funds, likely leading to both a rise in business investment and an increase in the interest rate as savers respond to the changes in the market.
Step-by-step explanation:
When a government provides a new tax credit for business investment, it is most likely to lead to an increase in business investment as the tax credit makes investing more attractive. According to the supply and demand framework in the credit market, businesses demand loanable funds, and a tax credit would effectively increase this demand. At the same time, the supply of loanable funds, provided by savers, might not change immediately.
Consequently, the increased demand for loanable funds tends to push the interest rate higher because now more businesses are competing for the same amount of savings, which is the supply of loanable funds. This higher price for loanable funds (higher interest rates) would then, in turn, attract more savers to supply their capital, representing an increase in the supply of funds over time.
The most likely outcome in this scenario is that business investment and the interest rate will both rise. It is important to note that over time, saving behaviors could adapt to these new interest rates, and the market will move towards a new equilibrium.