Question

Consider two alternative programs for contraction. One is the removal of an investment subsidy; the other is a rise on income tax rates. Use the IS-LM model and the investment schedule, as shown in figure 12-9, to discuss the impact of these alternative policies on income, interest rates, and investment.

Answer 1

The Is curve shows relation between interest rate and output. It shows the goods market equilibrium while the LM curve shows a direct relation interest and output. LM curve shows money and asset market in equilibrium.