a. If the central bank increases the money supply, the LM curve shifts to the right, causing the interest rate to decrease and income to increase. Lower interest rates typically lead to higher consumption and investment levels.
b. If the government increases government purchases, the IS curve shifts to the right, causing income to increase. This increase in income can lead to higher consumption and investment levels.
c. If the government increases taxes, the IS curve shifts to the left, causing income to decrease. Lower income typically leads to lower consumption and investment levels.
d. If the government increases government purchases and taxes by equal amounts, the IS curve shifts to the right and left respectively, balancing each other out. The net effect on income, consumption, and investment would depend on the relative magnitudes of the shifts in the IS curve.
4. According to the IS –LM model, what happens to the interest rate, income, consumption, and
investment under the following circumstances?
a. The central bank increases the money supply.
b. The government increases government purchases.
c. The government increases taxes.
d. The government increases government purchases and taxes by equal amounts�
1 answer