Final answer:
The increased tax rates on savings and corporate profits are likely to reduce the number of loanable funds borrowed and saved, with unclear effects on the interest rate, aligning with option D.
Step-by-step explanation:
The legislation that increases the tax rate on interest earned from savings and on corporate profit can lead to reduced incentives to save and invest. Considering that the elasticity of savings concerning the interest rate is relatively inelastic in the short run, an increase in the tax rate on interest would not significantly increase savings. On the corporate side, higher taxes on profits make investment less attractive, thereby reducing the quantity of corporate investment.
As a result, both the supply of loanable funds (savings) and the demand for these funds (investment) are likely to decline. According to the laws of supply and demand in financial markets, when both supply and demand decrease, the quantity of loanable funds will decline for sure, but the effect on interest rates is less clear without knowing which of the two effects is stronger.
Therefore, the correct answer to the question is D: reduce the quantity of loanable funds borrowed and saved for sure, but the effect on interest rate is unclear.