Question

（1）What is the impact of an increase in taxes on the interest rate, income, consumption, and investment? Use the IS-LM model to answer this question.

（2）What is the impact of a decrease in the money supply on the interest rate, income, consumption, and investment? Use the IS-LM model to answer this question.

Answer #1

**SOLUTION:-**

In both IS-LM graphs, IS0 & LM0 are initial IS & LM curves intersecting at point A with initial interest rate r0 and output Y0.

**(1)**

An increase in tax decreases Consumption and Investment. Hence, IS curve will shift leftward, decreasing both interest rate and output. A decrease in output decreases income

In following graph, IS0 shifts lefts to IS1, intersecting LM0 at point B with lower interest rater r1 and lower output Y1.

**(2)**

A decrease in money supply shifts LM curve leftward, increasing interest rate and decreasing output. A decrease in output decreases income, consumption and investment.

In following graph, LM0 shifts left to LM1, intersecting IS0 at point B with higher interest rate r1 and lower output Y1.

**THANK YOU**

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comment box.......**

1.
Explain impact of 1) increase and 2) decrease of interest rate on
money supply.

1.
Which of the following best describes the interest rate
effect?
Group of answer choices
a decrease in the supply of money will increase interest rates
and reduce interest-sensitive consumption and investment
spending.
an increase in the price level will increase the demand for
money, reduce interest rates, and decrease consumption and
investment spending.
an increase in the price level will increase the demand for
money, increase interest rates, and decrease consumption and
investment spending.
an increase in the price...

In the IS-LM model choose all of the following that could lead
to an increase in output, ceteris paribus.
Group of answer choices
Increase in money demand.
Decrease in money supply.
Increase in money supply.
Decrease in household savings.
Increase in household savings.
Decrease in money demand.
Increase in investment.
Decrease in investment.
Decrease in taxes.
Decrease in government purchases.
Increase in taxes.
Increase in government purchases.

1. If taxes
A. increase, consumption increases, aggregate demand shifts
right
B. increase, consumption decreases, aggregate demand shifts
left
C. decrease, consumption increases, aggregate demand shifts
left
D. decrease, consumption decreases, aggregate demand shifts
right
2. When the interest rate increases, the opportunity cost of
holding money
A. increases, so the quantity of money demanded increases.
B. increases, so the quantity of money demanded decreases.
C. decreases, so the quantity of money demanded increases.
D. decreases, so the quantity of...

1. Using the IS-LM graphs, explain what will happen to output
and the interest rate if consumers suddenly become pessimistic and
decrease their consumption spending at all levels.
2. Using the IS-LM graphs, explain what will happen to output
and the interest rate if financial panic leads to an increase in
the demand for money.

1. In the short-run IS-LM model with income taxation, taxes are
given by ?=? +??. Suppose that MPC = 0.75 and the marginal tax rate
?=0.2. Then, when ? decreases by 1000, then for any given interest
rate, the IS curve shifts:
Select one:
a. to the left by 1000.
b. to the right by 3000.
c. to the right by 3750
d. to the right by 1875.
2.
Suppose that the adult population in an economy is 28 million,...

Use the IS-LM model to answer this question and assume that the
central bank controls the
interest rate. Suppose there is a simultaneous decrease in taxes
and decrease in interest rate.
a. Explain what effect this particular policy mix will have on
output and the money supply.
b. Based on your analysis, do we know with certainty what effect
this policy mix will have on
investment? Explain

1.In the IS–LM model in a closed economy, an
increase in government spending increases the interest rate and
crowds out:
Select one:
a. the money supply.
b. investment.
c. taxes.
d. prices.
2.In the case of cost-push inflation, other things being
equal:
Select one:
a. the unemployment rate rises but the inflation rate falls.
b. both the inflation rate and the unemployment rate fall.
c. both the inflation rate and the unemployment rate rise at the
same time.
d. the...

6. Consider the IS-LM model. The central bank uses the interest
rate as its policy instrument. Illustrate and explain the impact of
the following shocks on the equilibrium values of real
income/output, money stock, consumption, and investment.
A. The non-bank private sector lowers its currency holdings.
B. Households increase autonomous saving
C. Default risk premium declines

If autonomous consumption is $1000, the MPC = 0.75, net taxes =
$500, investment spending = $800, and govt purchases = $500, and NX
= $0, what is equilibrium GDP?
Question 1 options:
$1,800
$1,925
$2,566.70
$7,200
$7,700
Question 2 (1 point)
The focus of the short-run macro model is on the role of
Question 2 options:
spending in explaining economic fluctuations
labor in explaining economic fluctuations
financial markets in explaining economic fluctuations
output in explaining economic fluctuations
resources in...

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