Suppose Fiscal Policy Makers Pass a Budget That Increases Taxes

question 11

Essay

Suppose fiscal policy makers pass a budget that increases taxes in the current period and are expected to raise taxes in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

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Definitions:

Diminishing Returns

A principle stating that as additional units of a variable input are added to a fixed input, the marginal product of the variable input eventually decreases.

Upward-Sloping

Describes a line or curve on a graph that moves higher on the y-axis as it moves to the right on the x-axis, typically used to describe a supply curve in economics.

Short-Run Average Total Cost Curve

A graphical representation that shows how the average total cost of production changes as the quantity produced changes in the short run.

Spreading Effect

The process by which increased investment leads to greater levels of income and consumption.