Question

Suppose Korea's new government increased VAT by 5% point. Explain the effect of tax increase using a D and S curves. Show how would this D and S change result in IS-LM analysis.

Answer 1

If Korea's new government increased VAT by 5% point, then the tax increase will cause the decrease in supply, so the S curve will shift to the left causing increase in equilibrium price and decrease in equilibrium quantity.