Answer to Question #276957 in Macroeconomics for Kaju

Question

Using IS-LM concept, show and explain the net effect of an increase in corporate

tax and increase in consumer confidence on equilibrium output and interest rate?

How does earlier effect changes if there is a slight positive relationship between

money supply and interest rate

Answer 1

The increase in corporate taxes shifts the IS curve. The LM curve does not

shift, the economy moves along the LM consumption goes down leading to a decrease of equilibrium output from Y to Y'. As a result, the interest rate decreases from I to I'

An increase in consumer confidence means the consumers will save less for the future and start to spend more.Consumption arises and thus expenditure arises. Therefore the IS curve shifts to the right and the output(income) increases from Y1 to Y2