Use the IS-LM Model to Predict the Short-Run Impact on the Interest

question 6

Essay

Use the IS-LM model to predict the short-run impact on the interest rate and output if the Fed pushes interest rates down at the same time that both consumption and investment fall due
to a financial crisis. Illustrate your Answer graphically. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium; and iv. the direction the curves shift. Explain your Answer in words.

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Definitions:

Depreciation

The systematic allocation of the cost of a tangible or physical asset over its useful life, recognizing it as an expense.

Tax Rate

The fiscal percentage deducted as tax from an individual's or corporation's income.

CCA Class

Capital Cost Allowance Classes are categories in tax systems that determine the depreciation rate for tax purposes on assets.

Depreciation Tax Shield

The reduction in taxable income for businesses due to the allowance for depreciation, thereby lowering tax liabilities.