Question

In each of the following​ cases, what is the effect on the IS​ curve?

A. An increase in the effective tax rate on capital
B. An increase in the money supply
C. A temporary increase in goverment spending

Answer 1

An increase in the effective tax rate on capital will shift the IS curve to the left, while an increase in the money supply and a temporary increase in government spending will shift the IS curve to the right.

Step-by-step explanation:

In each of the following​ cases, the effect on the IS​ curve is as follows:

1. An increase in the effective tax rate on capital: This will lead to a decrease in investment, which will shift the IS curve to the left. As a result, both income and interest rates will decrease.
2. An increase in the money supply: This will lead to a decrease in interest rates, which will stimulate investment and increase aggregate demand. As a result, the IS curve will shift to the right, leading to an increase in both income and interest rates.
3. A temporary increase in government spending: This will lead to an increase in aggregate demand. As a result, the IS curve will shift to the right, leading to an increase in both income and interest rates.