Use the diagram of the Keynesian cross or loanable funds model to show how an increase...

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Use the diagram of the Keynesian cross or loanable funds model to show how an increase...

Use the diagram of the Keynesian cross or loanable funds model to show how an increase in taxes shifts the IS curve. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium values

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Answer 1

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Increase in taxes will increase public savings. National savings are increased so the supply curve in loanable funds market shifts to the right. This reduces the market rate of interest and raises the quantity of funds demanded and supplied.

Interest rate ( SSI SS2 i2 DD L L2 Loanable funds (L)

Higher taxes would reduces disposable income so in the goods market there is a decline in the aggregate spending. AD shifts left and this reduces the real GDP. In IS-LM model this is shown as a leftward shift of the IS curve which shows a lower rate of interest and a lower real GDP

Figure A-3 LM Real interest rate, r 1S2 Income, Output, Y Ү, т,

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