a. Suppose that, ceteris paribus, the government raises taxes.Diagram the effects of such a change in the IS-LM model. Whathappens to “the” interest rate?b. Now show both the short-run and long-run effects of this changein the IS-LM model in the AS-AD model. What happens to the pricelevel and output in the short and long runs?

Question
Asked Dec 3, 2019
64 views

a. Suppose that, ceteris paribus, the government raises taxes.
Diagram the effects of such a change in the IS-LM model. What
happens to “the” interest rate?
b. Now show both the short-run and long-run effects of this change
in the IS-LM model in the AS-AD model. What happens to the price
level and output in the short and long runs?

check_circle

Expert Answer

Step 1
IS-LM model explains the relationship between the rate of interest and the asset market in the
economy. Tax is the unilateral payment that the people and firms have to pay to the government
for various purposes
help_outline

Image Transcriptionclose

IS-LM model explains the relationship between the rate of interest and the asset market in the economy. Tax is the unilateral payment that the people and firms have to pay to the government for various purposes

fullscreen
Step 2
a) If other things remaining the same, an increase in taxes shifts the IS curve to the left.
The LM curve remain the same and the economy moves along the LM curve. Figure 1
shows the effect of an increase in taxes
help_outline

Image Transcriptionclose

a) If other things remaining the same, an increase in taxes shifts the IS curve to the left. The LM curve remain the same and the economy moves along the LM curve. Figure 1 shows the effect of an increase in taxes

fullscreen
Step 3
LM
4
4-
IS
IS
(for T'>T)
Y
(for T
Y
Output, Y
Figure
Interest rate, i
help_outline

Image Transcriptionclose

LM 4 4- IS IS (for T'>T) Y (for T Y Output, Y Figure Interest rate, i

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Economics

Related Economics Q&A

Find answers to questions asked by student like you

Show more Q&A add
question_answer

Q: Suppose that New Zombie has adopted the framework used by the US Bureau of Labor Statistics to calcu...

A: Labor force consists of all those people who are willing and are able to work and are either employe...

question_answer

Q: In 2008 the Fed reduced both the discount and federal fund rates dramatically.  But bank loan volume...

A: Loan demand is subject to repayment option. If the economic condition guarantees that the loan can b...

question_answer

Q: Using the language of and components of the circular flow diagram, identify which institution or gro...

A: The government plays a major role in an economy. The government is missing from the diagram. It prov...

question_answer

Q: 7a.  What is an automatic stabilizer?  List three automatic stabilizers in the United States.   7b. ...

A: 7a. Automatic stabilizers are defined as the taxes and expenditures made by the government (fiscal p...

question_answer

Q: Suppose inflation is estimated at 5%, potential GDP is $18T and actualGDP is $20T. What federal fund...

A: Assuming that the real Federal Funds rate is 2% and the targeted inflation rate is 4%, the Federal F...

question_answer

Q: The Bureau of economic analysis announced today that gross domestic product, the widest measure econ...

A: Gross domestic product (GDP) is the sum of the market value of all final goods and services produced...

question_answer

Q: How do minimum wages affect wages, employment, and unemployment? In a competitive labor market, the ...

A: The employers legally pay a minimum wage to the workers which is the lowest remuneration that the wo...

question_answer

Q: 3. Which of the following is NOT an example of a sunk cost? a) Purchase of a hamburger after startin...

A: As per our Honor code, we can solve only 1st question. If you want the answer for rest of the questi...

question_answer

Q: How would universal basic income affect consumer optimum?

A: Universal basic income is a scheme to provide a specific sum of money to all the citizens of a count...