Question

Suppose the government cuts income that show in the IS-LM model the impact of the tax cut under two assumptions

(1) the government keeps interest rates constant through an accommodating monetary policy

( 2 )The money stock remains unchanged explain the difference in results

Answer 1

When the government keeps the interest rates constant through an accommodating monetary policy the assest or the goods decreases significantly while when the money stock remain unchanged,the interest rates are likely to remain constant.