Answer to Question #212538 in Macroeconomics for Depaaa

Question

If investment is very interest inelastic most of an income tax rate cut will be crowded out therefore central bank should always supplement a tax cut with an increase in money supply”. Comment on this statement with the help of IS-LM diagram and explain the adjustment process. Would your answer change if the price lend were allowed to change. Explain

Answer 1

A reduced demand for investment will lead to a high interest rates hence the is curve shifts to the right.

yes the answer will change because of the reduced interest rates. the price lend