Answer to Question #225822 in Macroeconomics for Sara

Question

3. a. How does an increase in the tax rate affect the IS curve?
b. How does the increase affect the equilibrium level of income?
c. How does the increase affect the equilibrium interest rate?

Answer 1

An increase in the tax rate shifts the IS curve

When taxes increase,Consumption goes down leading to a decrease in income. The decrease in income reduces the demand for money. The interest rate must decrease to push up the demand for money and maintain the equilibrium.