Question
In: Economics
Using the IS-LM model, show and explain how a decrease in taxes affects the interest rate...
Using the IS-LM model, show and explain how a decrease in taxes affects the interest rate and output.
Solutions
Expert Solution
It shall be noted that when the taxes decrease (deltaT < 0), then tax multiplier tells that the IS curve would shift to the right by an amount equal to (-MPC/(1-MPC))*(deltaT) from IS2 to IS1
The income and the interest rate both increase from Y2 to Y1 and r2 to r1 respectively.
Disposable income increases from Y2 to Y1 because income is higher and the taxes are lower. This causes consumption to increase.
With the fall in the tax rate, the LM curve remains unchanged. The economy moves along the LM curve.
As disposable income increases, it increases the demand for money. Given that the supply of money is fixed, the interest rate must increase to pull down the demand for money and maintain equilibrium.
The rise in the interest rate causes investment to fall.
Thus, as the tax decrease, the income and the interest rate both increase.
Rahul Sunny answered 2 years agoRelated Solutions
In the IS-LM model there is similtaneous decrease in tax and interest rate, the central bank...
In
the IS-LM model there is similtaneous decrease in tax and interest
rate, the central bank controls the interet rate
a) discuss the magnitudes, slopes and their impact on policy
effectiveness
b) Explain what effect this particular policy mix will have on
output and the money supply.
c) Based on your analysis, do we know with certainty what
effect this policy mix will have on invedtment use diagrams
Use the IS-LM model to explain and show how the level of income and the rate...
Use the IS-LM model to explain and show how the level of income
and the rate of interest are affected by each of the following
changes in a closed economy respectively:
(a) An autonomous decline in investment
spending.
(b) An increase in money supply.
(c) An increase in government expenditure
financed by an equal amount in taxes.
Using the IS–LM model, illustrate and explain how each of the following scenarios affects the home...
Using the IS–LM model, illustrate and explain how each
of the following scenarios affects the home country. Compare the
outcomes when the home country has a fixed exchange rate with the
outcomes when the home currency floats.
A decrease in Home Country’s Money Supply
The home country cuts taxes (Decreases the tax rate).
(a) Using the IS-LM-BP model, explain the effects of a decrease in foreign price on domestic...
(a)
Using the IS-LM-BP model, explain the effects of a decrease in
foreign price
on domestic economy under a flexible exchanger rate
(b)
Assumed that the BP curve is steeper than the LM curve. Using the
IS-LM-MP
model, analyze the effectiveness of the expansionary in fiscal and
monetary policy
under flexible exchange rates.
How does a decrease in expected inflation affect output and interest rates in the IS-LM model?...
How does a decrease in expected inflation affect output and
interest rates in the IS-LM model? Explain. Does the Fisher effect
hold in this context? Explain.
Explain, using the IS/LM/BP model, how an increase in foreign interest rates can lead to an...
Explain, using the IS/LM/BP model, how an increase in
foreign interest rates can lead to an increase in domestic interest
rates.
Explain, using the IS/LM/BP model, how an increase in foreign interest rates can lead to an...
Explain, using the IS/LM/BP model, how an increase in
foreign interest rates can lead to an increase in domestic interest
rates.
Use the IS-LM-PC model to explain how the economy adjusts to an increase in taxes in...
Use the IS-LM-PC model to explain how the economy adjusts to an
increase in taxes in the medium run. Assume that the economy starts
at a medium run equilibrium No graph necessary. Be sure to specify
which curve shifts in the medium run. State how output, inflation,
and the real interest rate change relative to the initial point
where the economy started. Make sure that you state how inflation
evolves differently under anchored expectations and under
backward-looking expectations.
Using the Keynesian-cross model, explain what happens to output following a decrease in the interest rate?
Using the Keynesian-cross model, explain what happens to output
following a decrease in the interest rate?
A) Using the IS-LM model, show graphically and explain the effects of a monetary contraction. What...
A) Using the IS-LM model, show graphically and
explain the effects of a monetary contraction.
What is the effect on the equilibrium interest rate and level of
output?
B) Using the IS-LM model, show graphically and
explain the effects of a monetary expansion. What
is the effect on the equilibrium interest rate and level of
output?
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