Question

Assume the economy is in short run equilibrium. In the graph below depict what will happen in the market for money should the governemnt decrease the tax on corporate income.

Assume the economy is in short run equilibrium. In the graph below depict what will happen in the market for money should the government decrease the tax on corporate income. Don't forget to label your curves and axis.

Answer 1

Interest nate sity of money

The money market is the interaction among institutions through which money is supplied to individuals, firms, and other institutions that demand money. Money market equilibrium occurs at the interest rate at which the quantity of money demanded is equal to the quantity of money supplied. The above figure combines demand (Md) and supply (Ms) curves for money to illustrate equilibrium in the market for money. With a stock of money (M), the equilibrium interest rate is r.

Now, the government decides to decrease the tax on corporate income, this implies that the people will have more income left with them than before. This will lead to increase in their money demand due to high income, this will shift the money demand curve towards right to Md' and money supply would remain constant at Ms. As a result the interest rate will rise to r' and will get a new equillibrium level.