Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 12, Problem 1QQ
To determine
The factor that causes the income to decline and the interest rate to rise under the IS-LM model.
Expert Solution & Answer
Answer to Problem 1QQ
Option 'd' is correct.
Explanation of Solution
Under the IS-LM model, a change in the money supply and the change in the tax rates will have a great impact over the interest rate in the economy. This is because the IS-LM model explains the relationship between the interest rates and the asset market in the economy.
Option (d):
When there is a decrease in the money supply, the policy becomes a contractionary
Option (a):
When there is an increase in the tax rate in the economy, the disposable income of the consumers will decline in the economy. Thus, the fiscal policy will become a contractionary policy. As a result of the contractionary policy, the IS curve will shift toward the left, and as a result, the interest as well as the income level of the economy will decline. Thus, option a is incorrect.
Option (b):
When there is a decrease in the tax rate in the economy, the disposable income of the consumers will increase in the economy. Thus, the fiscal policy will become an expansionary policy. As a result of the expansionary policy, the IS curve will shift toward the right, and as a result, the interest as well as the income level of the economy will increase. Thus, option b is incorrect.
Option (c):
When there is an increase in the money supply, the policy becomes an expansionary monetary policy. When the expansionary monetary policy takes place, the LM curve will shift downward, and the interest rate will fall, whereas the income level of the economy will increase. Thus, option c is incorrect.
Economics Concept Introduction
Tax: Tax is the unilateral payment that the people and the firms have to pay to the government for various purposes, such as the income earned, profit made, property owned, and so on.
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