Answer to Question #145239 in Macroeconomics for Vivian Nyange

Question

Consider the current situation of covid 19 and government rejoinder to the situation which has been through plummeting taxes. Using the IS-LM framework show the impact of this policy under the following assumptions.
1.government keeps interest rates constant
2.the money stock remains unchanged

Answer 1

When taxes increases (decreases) and interest rates and money stock remains constant, the IS curve shifts left (right) because taxes effectively decrease consumption. Again these are changes that are not related to output or interest rate, which merely indicate movements along the IS curve. The LM curve does not shift, the economy moves along the LM curve.