Joshua nangai
Aug 7
With the aid of a diagram using the IS-LM model, explain how a decrease in tax as government fiscal policy will affect the position of the IS curve?
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ChatGPT
Aug 7
In the IS-LM model, the IS curve represents the equilibrium in the goods market, while the LM curve represents the equilibrium in the money market. When there is a decrease in taxes as government fiscal policy, it leads to an increase in disposable income for households, which in turn increases consumption and aggregate demand.
This increase in aggregate demand shifts the IS curve to the right. This is because at any given interest rate, there is now higher demand for goods and services in the economy. As a result, the equilibrium level of output and income increases, leading to a higher level of GDP.
The diagram below illustrates this shift in the IS curve to the right following a decrease in taxes:
[IS-LM diagram with IS curve shifting to the right]
Overall, a decrease in taxes as government fiscal policy leads to an increase in aggregate demand, which shifts the IS curve to the right in the IS-LM model. This results in higher output and income levels in the economy.
This increase in aggregate demand shifts the IS curve to the right. This is because at any given interest rate, there is now higher demand for goods and services in the economy. As a result, the equilibrium level of output and income increases, leading to a higher level of GDP.
The diagram below illustrates this shift in the IS curve to the right following a decrease in taxes:
[IS-LM diagram with IS curve shifting to the right]
Overall, a decrease in taxes as government fiscal policy leads to an increase in aggregate demand, which shifts the IS curve to the right in the IS-LM model. This results in higher output and income levels in the economy.
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Google Gemini AI
Aug 7
IS-LM Model
[Image of IS-LM model]
Effect of a Decrease in Tax on IS Curve
A decrease in tax increases disposable income, leading to increased consumption spending. This upward shift in planned aggregate expenditure shifts the IS curve to the right (IS1).
Diagram Explanation:
- Original IS Curve (IS): Represents the initial equilibrium level of output (Y) and interest rate (i) at E.
- Decrease in Tax: Increases disposable income, leading to increased consumption spending.
- Rightward Shift of IS Curve (IS1): The increased consumption spending results in a higher equilibrium level of output (Y1) and a higher equilibrium interest rate (i1).
Reasoning:
- With more disposable income, households increase consumption spending.
- This increased spending raises aggregate demand and shifts the IS curve to the right.
- The higher output level leads to increased demand for loanable funds, raising the equilibrium interest rate.
[Image of IS-LM model]
Effect of a Decrease in Tax on IS Curve
A decrease in tax increases disposable income, leading to increased consumption spending. This upward shift in planned aggregate expenditure shifts the IS curve to the right (IS1).
Diagram Explanation:
- Original IS Curve (IS): Represents the initial equilibrium level of output (Y) and interest rate (i) at E.
- Decrease in Tax: Increases disposable income, leading to increased consumption spending.
- Rightward Shift of IS Curve (IS1): The increased consumption spending results in a higher equilibrium level of output (Y1) and a higher equilibrium interest rate (i1).
Reasoning:
- With more disposable income, households increase consumption spending.
- This increased spending raises aggregate demand and shifts the IS curve to the right.
- The higher output level leads to increased demand for loanable funds, raising the equilibrium interest rate.
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