In Explaining His 2003 Bill to Cut Taxes,president Bush of the United
In explaining his 2003 bill to cut taxes,President Bush of the United States said "When people have more money,they can spend it on goods and services."
a.In the IS-LM model,will a tax cut change the money supply in the economy? Does a change in the money supply shift the IS or the LM curve?
b.In the IS-LM model,does a tax cut shift the IS or the LM curve?
c.Based on your answers in a and b,how can you reconcile the President's statement with economics? Can you suggest how his statement could be modified to be consistent with the IS-LM model?
Compare how equilibrium is attained in the market for goods and services versus the market for real-money balances. (Hint: Explain what force moves the market back to equilibrium if the market is initially in disequilibrium.)
Two identical countries,Country A and Country B,can each be described by a Keynesian-cross model.The MPC is .9 in each country.Country A decides to increase spending by $2 billion,while Country B decides to cut taxes by $2 billion.In which country will the new equilibrium level of income be greater?
a.The interest rate affects which variable in the market for goods and services versus the market for real money balances?
b.The level of income affects which variable in the market for goods and services versus the market for real money balances?