The following question relates only to the equilibrium in the goods market IN A CLOSED ECONOMY and asks you to carry out a graphical analysis using both the Keynesian cross diagram together with the IS-MP diagram   a) Suppose the goods market is initially in equilibrium. Suppose the government wants to implement a reduction in the overall level of taxation. What is the effect on output, consumption, investment and interest rates of this tax reduction? Explain and illustrate graphically your answer using both the Keynesian cross diagram in combination with the IS-MP diagram.

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A:

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A: Equilibrium in the market occurs where income is equal to aggregate expenditure.

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