According to the IS-LM Model, When the Government Increases Taxes

question 84

Multiple Choice

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

• A) income, the interest rate, consumption, and investment are unchanged.
• B) income and the interest rate rise, whereas consumption and investment fall.
• C) income and the interest rate fall, whereas consumption and interest rise.
• D) income, the interest rate, consumption, and investment all rise.

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Definitions:

Isocost Line

A graph that shows all possible combinations of inputs that can be purchased with a given total cost.

Price of Capital

The cost of using capital resources, such as equipment or buildings, often reflected in interest rates or rental prices.

Price of Labor

The wage rate or compensation given to workers for their labor, typically expressed per hour or year.

Isocost Line

A graphical representation in economics showing all combinations of inputs that have the same total cost.